Bigger Stakes in US REITs for Foreign Investors
Some of the U.S. restrictions on foreign investment in real estate were considerably eased at the end of 2015. This is likely to boost the already high volume of international CRE transactions in the coming years.
Twenty percent of the deals made on CRE in the U.S. currently involve foreign capital, with the heaviest investment coming from Canada, China, and Australia. It is likely that China’s participation will accelerate, thanks in part to the Chinese government’s loosening of restrictions on overseas investment. Interest in international investment is surging, and pension funds around the world are looking to increase their allocation rates for real estate.
Those investors will be allowed a bigger slice of the U.S. CRE pie, thanks to recent changes to FIRPTA (Foreign Investment in Real Property Tax Act) that have helped ease the tax burden on foreign investors in the U.S. Many changes are laid out in the REI (Real Estate Investment) and JOBS (Jumpstart Our Business Startups) Act, finalized last year.
Supporters say that the JOBS Act will allow billions more dollars into the U.S. CRE market, which in turn will “jumpstart credit markets, fund infrastructure projects, and create jobs and economic opportunities.” It has effects well beyond CRE investment. For international investors, it decreases the high transaction costs that were an obstacle before.
Another important legislative development is the PATH (Protecting American Taxpayers from Tax Hikes) Act. This new law affects foreign investors in 2 major ways.
First, the law doubles the maximum amount of stock ownership that a foreign investor may have in a U.S. publicly-traded REIT from the previous limit of 5% to 10%. The law also permits certain foreign pension funds to invest in real estate investment trusts (REITs) without having FIRPTA treatment apply.
These developments come on the heels of a record year for international investment in the U.S. market. Companies that have previously invested via joint ventures with U.S. partners and asset management companies may now be more likely to choose to invest directly, resulting in a larger share of foreign capital in the market. Some estimate that as much as $30 billion in additional capital will flow into the U.S. CRE market in 2016 as a result of the tax exemption.
There seems to be an effort underway to decrease the friction of international investment, and this is a great thing for CRE in the U.S. Our relatively stable economy makes it a safe haven for foreign capital, and opportunities are increasing, in various forms.
Real estate crowdfunding platforms are pulling a wider variety of investors into the market, and some, like FundRise, are handling international transactions. Many investors want to be able to participate in the most attractive deals regardless of geography, and this vastly expands the pool of buyers for U.S. properties.
It seems likely that, encouraged by loosening restrictions and more efficient processes, international investors will continue to view the U.S. market favorably. The current favorable state of rents, valuation, and occupancy in the CRE market will help U.S. properties to remain attractive for international investment.