(Bloomberg News) Beverly Hills, the California enclave known for its celebrity residents and Rodeo Drive boutiques, is luring wealthy individuals seeking real estate investments, driving up prices for trophy apartment buildings in the city.

A 24-unit multifamily complex, located one block from the Four Seasons Hotel Los Angeles at Beverly Hills, sold in March for $7.5 million, giving its buyer a lower return than similar buildings in the U.S. The property is a mile (1.6 kilometers) from the home of Doug Ellin, creator of HBO's "Entourage," and two miles from actor Billy Bob Thornton's house.

Buyers with high net worths are accepting lower and lower capitalization rates, a measure of yield in the real estate industry, for rental apartments in the Los Angeles area's wealthiest neighborhoods. The Beverly Hills investor accepted an annual cap rate of 4.5%, more than two percentage points below the national average, said Hamid Soroudi, senior managing director at Los Angeles-based real estate firm Charles Dunn.

"It seems almost a privilege to own these multifamily units in these areas because they're not replaceable and seldom on the market," said Christopher Cooper, Charles Dunn's chief executive officer. "When these assets do come on the market, there is a bit of a feeding frenzy."

Nationwide, the average cap rate for apartment buildings slipped to 6.6% in the latter half of 2010 from 6.9% in the first six months, according to New York-based research company Real Capital Analytics Inc. The cap rate is a property's annual income divided by the purchase price.

Platinum Triangle

A 29-unit apartment building in Bel Air-part of the Platinum Triangle of wealthy neighborhoods along with Beverly Hills and Holmby Hills-sold in March for $7.2 million. That gave it a cap rate of 4.6%, according to Soroudi. The average rate in the Los Angeles area's richest enclaves slipped to about 4% during the first quarter from 5% in mid-2010, he said.

Multifamily property prices have soared as much as 30% in the most affluent parts of Los Angeles over the past 18 months, said Hessam Nadji, managing director of research at Marcus & Millichap Real Estate Investment Services Inc. in Walnut Creek, California. Values have risen even as California's jobless rate stood at 12% in March, higher than the U.S. average of 8.8%. The state's credit rating from Standard & Poor's is the lowest in the U.S., and Governor Jerry Brown is struggling to close a $15 billion budget deficit.

Values in high-end neighborhoods have been driven up in part by demand for multifamily properties priced at $20 million or more. The dollar volume of such transactions jumped 202% last year in Los Angeles County, more than the nationwide increase of 179%, Nadji said.

'Monopoly Game'

"Real estate is not hard to understand and there's a lot of pride in owning any kind of home or apartment building," said Ken Chong, regional director at Los Angeles-based Commercial Investment Brokerage Corp. "It's pride of ownership as compared to stocks or bonds, which is a piece of paper-if that. It's this Monopoly game that rich people like to play."

Michael Hakim, a Beverly Hills resident who has been investing in multifamily properties in Los Angeles for a decade, last year bought a 25-unit Beverly Hills building near the luxury SLS Hotel at Beverly Hills. He declined to say how much he paid. Hakim said tenant demand is growing for apartments in such neighborhoods, which are becoming "small Manhattans" where people work, live and socialize.

Echo Boomers

Building tenants in wealthy neighborhoods "are the so- called echo boomers-the sons and daughters of rich baby boomers," said Mark Crawford, president of Crawford Park Financial Inc., a Beverly Hills-based real estate investment firm. "You combine those with a growing and upcoming immigrant population and you have set the stage for a tremendous run in the apartment business."

U.S. apartment vacancies declined to the lowest in almost three years in the first quarter as the weak homebuying market fueled rental demand, New York-based research firm Reis Inc. said last month.

Cap rates for apartment buildings also are dropping in Manhattan and Connecticut, including such wealthy areas as Greenwich. In those areas, they declined to 6.7% in the first quarter from 6.9% in July 2010, Real Capital said.

In Southern California, the search for safe investments is driving high-net-worth individuals to buy multifamily properties in upscale neighborhoods, said Jason Thomas, Los Angeles-based chief investment officer for wealth management firm Aspiriant.

Nervous Investors

"The interest in these areas is less driven by the valuations, which in fact are high, but by the fact that they are nervous about any other investment," he said. "They are excited by the yields relative to fixed income, and they are focused on the tax advantages. Plus you can walk down the street and look at it."

Buying apartment buildings in affluent neighborhoods is an investment strategy that can take years to pay off, said David Cohen, president of Los Angeles-based apartment investor Karlin Asset Management. It's "a great investment strategy -- if you have patient capital," he said.

A rebound in the real estate market may boost buyer confidence and spur investors to focus less on wealthy neighborhoods and more on "class B assets or mid-tier areas," Nadji said. An economic recovery also will lead to price appreciation in upscale neighborhoods, diminishing demand.

"Prices that are happening at the moment are incredibly high in respect to a year ago," said Soroudi of Charles Dunn. "In another six months, the market may get too hot for many of these buyers."

'Looking to Buy'

Hakim, who says he owns "a handful" of buildings in Los Angeles, isn't deterred. He's now looking at two adjacent buildings with a combined 33 units in the Brentwood area of West Los Angeles. The seller wants $10 million, and the property is likely to need $20 million to $30 million in renovations and upgrades, Hakim said. He is considering forming a joint venture with the current owner to share the costs.

"If somebody is selling at the beach, I'm looking to buy," said Hakim, who ran unsuccessfully for a seat on the Beverly Hills City Council two years ago. "The Westside is very competitive. There's a lot of commerce, it's a lovely atmosphere and everybody likes to go to the beach."