Where are the world's major real estate investors looking to place their funds? To borrow a line from a Neil Diamond song, they're coming to America.
‘An awful lot of people from the Middle East, Asia and South America are investing in the U.S. market,’ observes Will Sledge, managing director at New York-based Mission Capital Advisors. ‘People look around at the global markets, and the U.S. continues to be – with its own problems – the safest market for investment.’
Jed Smith, managing director of quantitative research at the National Association of Realtors (NAR), points out that one of the brighter spots in the U.S. housing market has been the interest from abroad. According to NAR's 2011 Profile of International Home Buying Activity, the total level of residential international sales in the U.S. for the 12-month period ending March 2011 equaled $82 billion, up from $66 billion for the same period one year earlier.
‘The U.S. market is pretty attractive to foreign buyers,’ Smith explains. ‘Pricing is down, interest rates are down and – because, in many cases, foreigners do not obtain loans to purchase property – the U.S. dollar is relatively weak compared to other currencies. From the foreign investors' point of view, this represents portfolio diversification – people live in other countries, but they want to have wealth in this country.’
Things are also hopping on the commercial-property side of the industry. A recent survey of the membership of the Association of Foreign Investors in Real Estate (AFIRE) found more than $874 billion has been invested globally in commercial real estate, with $338 billion placed in the U.S. Edward Mermelstein, real estate attorney and founder of New York-based Mermelstein & Associates, credits the foreign interest in U.S. commercial property to the global opinion that the domestic economy is rebounding.
‘The U.S. economy is being perceived as an economy heading in the upward direction, as opposed to many other economies that are either slowing down or heading downward,’ he says. ‘Many investors in the BRIC countries (Brazil, Russia, India and China) are looking for safe locations, and the U.S. is always seen as a safe haven for capital.’
Max Swango, managing director and founding partner at Atlanta-based Invesco, observes that U.S. property – especially commercial real estate – satisfies the focus of these investors.
‘They like investing in hard assets – something you can see and touch and understand,’ he says. ‘They do not want a private-equity thing or a hedge-fund thing that you cannot understand. Real estate has a nice income component to it. Also, foreign investors tend to take a longer-term view than some U.S. investors. A lot of foreign investors we work with focus on buying property that they want to own for a long, long time – which could be 10 years or 50 years.’
However, the picture is not entirely sunny. AFIRE found that although 60% of its recent survey's respondents planned to increase their investment in U.S. real estate in 2012, that number is down from 72% last year. Also, the U.S. saw its first-place score among AFIRE members shrink from 64.7% in last year's survey to 42.2% this year, with Brazil closing the gap in second place with 18.6% of the votes.
AFIRE also claims that a key stumbling block to bringing more international money to the U.S. was the Foreign Investment in Real Property Tax Act (FIRPTA), which authorizes the federal government to tax foreign persons on dispositions of U.S. real property interests. According to the Internal Revenue Service (IRS), a foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 35% of the gain it recognizes on the distribution to its shareholders.
‘Foreign real estate investors have made clear there is considerable pent-up demand for U.S. real estate awaiting better real estate fundamentals and relief from FIRPTA regulations,’ says James A. Fetgatter, CEO of AFIRE. ‘If the investing environment improves, the U.S. is poised to return to its 'safe haven' status.’
However, Mermelstein questions whether FIRPTA plays a significant role in directing foreign investors to other countries.
‘It has a very small aspect,’ he says. ‘It is more of a psychological deterrent than anything else. With proper tax planning, the FIRPTA scenario can be avoided if you file with the IRS before your closing. At the end of the day, it is treated the same as a U.S. resident in any real estate transaction.’
For Richard Zahm, director of client development at New York-based Covendium, a more serious obstacle is the EB-5 visa program, which provides a vehicle for foreign nationals who invest money in the U.S. to obtain a green card.
‘In the aggregate, the program has had minimal impact because of the relatively low participation rate,’ says Zahm. ‘Over the past 21 years, it has only brought in about $2 billion, a tiny fraction of total direct foreign investment outside of the program. It has also been funneled into a fairly narrow class of investments.’
Zahm notes that only approximately one-third of the visas earmarked annually for the program are issued, due to problems with how the program operates.
‘Investors have to overcome two hurdles,’ he continues. ‘First, their personal applications have to be accepted. Second, the project they invest in has to be accepted. These are on top of the basic investment risk, and the process can take years. Australia, Canada and Mexico offer competing programs with less onerous terms.’
Upgrading the immigration process to encourage real estate investment was the impetus behind a bill introduced last fall by Sens. Charles Schumer, D-N.Y., and Mike Lee, R-Utah. Under this proposed legislation, foreign investors would receive a three-year ‘homeowners visa’ if they invest half a million dollars cash and stay in the house for 180 days.
Edward Kramer, executive vice president at Minneapolis-based Wolters Kluwer Financial Services, believes the Schumer-Lee bill would help reanimate the sluggish U.S. housing market.
‘It is a great time to buy, especially for buyers who come from countries that have strong economies,’ he says. ‘At the same time, the U.S. currency is declining in value. All of that makes for a perfect storm – foreign buyers are one of the ways that will help get us out of this situation.’
But even with these potholes, industry experts concur that the road to U.S. property will be able to attract considerable traffic.
‘With the instability and volatility of the capital markets, real estate is a safe haven for an investor,’ says Mitch Roschelle, founding partner and partner in the real estate advisory practice at PwC. ‘It is a tangible, income-producing asset. The markets may be worth one thing one day and 20 percent less the next. Real estate, on the other hand, is the ultimate income-producing asset.’
Phil Hall is the editor of MortgageOrb. Please address all comments on this and other MortgageOrb E-Features to firstname.lastname@example.org.