Published on Tuesday, November 10, 2015 by Land Century
While you would imagine that investors would be interested in land here because of our affordable prices, it seems as if these investors are actually paying much higher prices per acre than the land is worth. And for the average farmer, its hard to compete with $7,000 an acre, which is the going price for foreign investors looking for US land. Yes, there are still many areas of the country where land is cheap and foreigners are interested in those properties, too but many are purchasing land at phenomenally high rates.
Aging Farmers Are Looking for Liquidity
A 2013 report from The New York Times noted that higher prices for corn and soybeans were pushing auction prices for farmland sky-high. And acreage is not only being bought out by farmers, but investors and many of them are from overseas. In 2014, values were four times higher than the peak price per acre during the bubble in the 1970s. Many of todays farmers are quickly approaching retirement, and oftentimes, their children have no interest in entering the business. At that point, it becomes difficult for farmers to reject offers as high as $7,000 to $10,000 an acre.
In 2012, UBS AgriVest, a part of the major Swiss bank UBS, bought 9,800 acres in southwest Wisconsin for $67.5 million, or about $7,000 per acre. UBS AgriVest has also purchased land in Georgia, Mississippi Delta, and the Mountain West.
In Michigan, Gladstone Land Corp. purchased land parcels to grow blueberries and other row crops. The company will then rent the land to corporate farmers who will cultivate the crops. Many states have laws that limit the amount of land foreign investors can purchase. For example, foreigners can only purchase 640 acres of land total in Wisconsin. But many state governments are looking to repeal these laws, which would give foreign investors ample opportunity to gobble up U.S. land.
Foreign Investors Drive Up Real Estate Prices
Aside from farmland, foreign investors are also snatching up real estate at record rates. New York, in particular, is being targeted by wealthy Chinese investors. The end result? Higher real estate prices.
In 2013, foreign purchases were up 35%, and Chinese investors led the way, accounting for $22 billion of the $92.2 billion spent by foreign investors in the U.S. real estate market. Between April 2012 and March 2013, Chinese investors spent $12.8 billion in U.S. real estate. The previous year, foreigners spent $68.2 billion on real state in America. The majority of Chinese buyers are paying for their purchases in cash, too, which is something brokers love.
Between April 2014 and March 2015, overseas buyers spent $104 billion on U.S. real estate, or about 8% of existing home sales. Most Chinese investors are snatching up real estate in wealthier cities, like New York, San Francisco, and Los Angeles. On average, these investors pay $590,826 for a single home.
In time, a flooding of foreign investments in residential real estate will drive up prices and make the average home unaffordable to the middle class. Were already seeing this happen in major cities like San Francisco, Seattle, Dallas, New York and Denver where home prices are out of reach for the average American.
Why Are Foreign Investors So Attracted To The US?
There are a number of reasons why foreign investors are snatching up land and real state in the United States.
For starters, U.S. real estate is still cheap compared to other cities around the world. A condo that costs $1.6 million in New York might cost $4 million in Paris. In London, property prices are now reaching $8000-$10,000 per square foot. In the United States, theres still some of the beach property markets that are selling at $200 per square foot.
Compared to the prices overseas, spending $350,000 or more on a single-family home seems like a bargain deal. For this reason, international buyers and investors continue to seek out US property. And ultimately, they wind up pushing property prices higher in the long run. San Diego, California is a prime example of how foreign investors can drive up the real estate market.
Real estate is also a safe investment for wealthy foreign buyers. The U.S. offers real estate buyers a lot of protection and security, which is something that cant be said for other countries. In addition, land and real estate in the U.S. adds diversification to an overseas investors portfolio.
Availability of long-term fixed rate mortgages also attracts foreign buyers. Even when the real estate market reached its lowest point, Americans still had easier access to mortgage financing than many other countries in the world. In fact, the majority of countries do not even offer long-term fixed rate mortgages. Instead, these countries work on short-term, adjustable-rate mortgages. With the ability to lock in a low interest rate and payments 15 to 30 years, overseas buyers are attracted to U.S. real estate.
Properties in the U.S. also provide positive cash flow because of their low prices. Overseas buyers can scale their real estate investments in America and generate a substantial amount of passive income. This is something that is not achievable in many other countries, like Australia, where investors continue to invest in negative cash flow properties.
Over the last year, the number of properties sold to foreign investors has declined. This is primarily because the US dollar is now stronger, which makes real estate investment more costly for overseas buyers. That said, prices in the U.S. still remain low and will continue to attract foreign investors well into the future. A stronger dollar may make investing too costly for some, but farmland and cheap real estate will still be a hot commodity to wealthy foreign investors who can quickly and easily use this investment vehicle to further grow their wealth.