3/11/2022

If you build it, they will come

Viewpoint

Recent research published by Newmark on the US multifamily sector puts into numbers the extraordinary strength of this asset class at the moment, and helps to explain why many investors are switching their attention to developing such products from the ground up.

I’d heard that competition for existing multifamily assets was intense, but the data is simply breath taking. Newmark reports that sales volume reached a record US$335 billion in 2021, 74% higher than the previous peak of US$193 billion in 2019. Equally remarkable is that the volume transacted in the fourth quarter of 2021 at US$149 billion exceeded the US$147 billion closed for the whole of 2020.

Investors, both Islamic or not, are drawn to the resilience of the ‘beds, sheds and meds’ sectors, and for good reason it would seem, with Newmark adding that total returns for US multifamily was 19.9% last year, more than double the long-term average of 8.6%.

GFH Financial Group contributed toward this activity last year, with acquisitions in Baltimore and Las Vegas, while Qatar First Bank was on the sell side in Connecticut.

But as demand versus supply analysis predicts, this is pushing prices up and yields on acquisitions down. With an average yield on acquisitions of 4.6%, this is the lowest for at least 20 years, and considering that this covers stock of all qualities and locations, the best product will be at 3% and below.

Even with projected strong rental growth, this makes achieving the desired returns of many Islamic investors rather difficult, and is encouraging a switch in strategy to consider developing such products, seeking tenants for the accommodation and then selling into what could remain a strong market for the next few years.

We have adopted such a change in strategy at 90 North, seeking out market leading developers to back and build, if you will excuse the pun, on the experience of our US team. Investment is a trade of risk versus reward, and we feel that the strength in multifamily supports such a move.

Written by Philip Churchill, first published in Islamic Finance news Volume 19, Issue 10 dated 9th March 2022.