Off-Market Deal Book | January 2016

The Brevitas Off-Market Deal Book provides you with a curated, varied selection of recent off-market commercial real estate transactions.

3 Considerations to Make Before Investing in International CRE

Opportunities abound in international real estate. Twenty percent of the deals made on CRE in the U.S. currently involve foreign capital, and American investors are also taking a closer look at investing overseas.

Investing in properties internationally necessarily involves considerations that domestic investment does not. In addition to customary concerns, like property history, financing, and market trends, international investors must consider conditions and laws in the country where the deal is located.

Consideration #1: Economic Stability

Before considering specific properties in a given location, international investors should consider the overall state of the local economy. Any international CRE investment comes with risks as well as rewards, but investing in an area with unstable economic conditions raises risk considerably. It’s essential to get an accurate picture of local conditions before getting into an overseas market, and to understand how the business is conducted there.

Part of the reason that foreign investment in U.S. CRE has been booming in recent years is the stability of the economy and its steady recovery from the financial crisis of 2008. This is attracting investors in droves –particularly from Canada, China, and Australia- to U.S. properties, with the most activity seen in “gateway” cities like New York, Washington DC, Los Angeles. As those markets become increasingly competitive, we’re seeing more investors taking a look at the secondary markets as well.

Growth has been less robust in other markets, but some areas that seem to be gaining speed and attracting investors from the U.S. include Asian markets such as China and Japan. It’s important to understand differences in the way CRE business is conducted there before entering the market. For example, in Japan, large brokerage firms that are related to the large real estate companies or trust banks often manage midscale and larger investment proposals. There, brokers can represent both sellers and buyers and may bill both parties for agency processing fees. Investors must find a balance between what is required to comply with global investment standards and what’s required to meet customary Japanese market practices. This idea applies wherever the potential investment is located.

Consideration #2: Tax Requirements

Even the sweetest CRE deal can be unprofitable if the local tax law is not favorable. Recent changes to FIRPTA have helped ease the tax burden on foreign investors in the U.S., and there are many tax advantages for U.S. investors participating in the international market.

While property taxes can be the single biggest carrying cost for U.S. real estate, many countries impose very low property taxes (France, Ecuador, Uruguay, and Colombia, for example) or no property taxes at all (Croatia and New Zealand). Some of these same countries impose no capital gains tax on real estate earnings, including Croatia and New Zealand. Other nations with this policy include Nicaragua, Belize, and Argentina. On the other hand, CRE profit distributions in Japan are subject to a 20.42% withholding income tax, although this may be reduced under certain income tax treaties with Japan.

Consideration #3: Management

As with any investment, international real estate should be approached with a solid plan, including an exit strategy. A full understanding of the investor’s role and obligations regarding management of the property is essential before moving forward. Details about the property developer, like do they have full title to the property in question, and is that guaranteed in the contract? How do they handle closings and financing details? What is their background and reputation?

Checking out details like this can be time-consuming, even for domestic properties, but it’s a critical step. Relying on professionals who make it their business to fully vet CRE deals can save time and money. At Brevitas, we offer our clients exclusive access to solid international deals as well as the expertise to navigate overseas transactions smoothly.

4 Ways Technology Makes International Property Investment Easier

In the past, no one in their right mind would have considered making a major international property investment without personally inspecting the site and meeting personally with the seller. This made investing in foreign properties difficult. International real estate investment was once reserved for highly connected entities with deep pockets. Smaller investors and those just entering the international arena didn’t have access to the most attractive deals, and the complexities of investing solo kept many out of the game.

However, over the last decade CRE has increasingly taken advantage of digital tools and platforms that remove those barriers. Technology is making it easier to make connections and identify opportunities in international real estate investment, in several ways.

#1: Access

Digital tools allow us to explore properties virtually, interact with professionals, and verify critical information more quickly. We have access to a tremendous amount of information, and various platforms specialize in aggregating and presenting information on market conditions, development, and demographics that contribute to sound decision making when it comes to investing locally or around the world.

#2: Partnerships and Services

Working through traditional channels required the ability to make contacts in the target market through referrals or associates, and for the most part these were unavailable for foreign properties. Through investment platforms, the players in real estate deals can connect, and investors can verify the credentials, history, and reputation of brokers, developers, and other key partners in the investment process, no matter what the geographic separation.

At Brevitas our sellers are all verified, our opportunities vetted to ensure that our users don’t waste time on low-quality deals. We have the international connections you need to be confident in participating in deals around the globe.

#3: Regional Differences

Foreign investment comes with its own set of unique challenges. Understanding the economic situation in an investment’s location is part of the vetting process. Tax considerations, social issues, and local customs for investment play a large part in the potential profitability of a deal, and having access to this information digitally is just the start.

Using “big data” to construct a complete picture of conditions and markets is becoming a common practice in real estate, and investors benefit tremendously from access to this information. This facilitates transactions and makes the entire process much more efficient and transparent.

#4: Investment Options

The use of technology has expanded the options available to real estate investors. Crowdfunding platforms for CRE are big news, providing smaller companies and individual investors with the same opportunities available to REITs, in many cases. Certainly we have access to more and better opportunities than ever before, thanks to these digital tools.

Our goal at Brevitas is to distill that sea of deals down to the most select, solid, and sound investment opportunities available on the world market. We provide our clients with all of the essential information on these high-quality listings, and we match investments to their specified criteria.

Digital tools are only as good as their content. CRE is still all about connections, trust, and experience. The best technology helps to create those connections and eliminate irrelevant information for confident decision-making.

Where Foreign Investment in U.S. CRE is Headed in 2016

This has been a very strong year for foreign investment in U.S. commercial real estate. Nearly 20% of the total sales volume for CRE in the U.S. now comes from international capital. There are a number of factors that fuel this flurry of activity. Our economy is strong and stable, relative to other markets, and transactions are more transparent. Low interest rates and favorable spreads are attracting the attention of foreign investors with large amounts of capital to park in a safe place. Capital preservation and higher yields help to draw international buyers to the U.S. market.

Continued Expansion

Sources of the most foreign capital continue to be Canada, China, and Australia. It seems likely that China’s share of global real estate investment will grow, as that nation’s participation exceeded $10 billion for the first time last year. This growth continues to accelerate in response to the Chinese government’s loosening of restrictions on overseas investment.

The U.S. government is doing its part to encourage international investment as well, making significant changes this year to FIRPTA, which was originally passed 35 years ago with the intention of discouraging cross-border investment through heavy taxes on foreign buyers of U.S. real estate. Response to developments there as recently as October will surely accelerate as we move further into 2016.

According to a survey released by the Association of Foreign Investors in Real Estate, about 64 percent of foreign investors expect to make modest or major increases in their investments into U.S. real estate this year. And none of the surveyed investors are planning to decrease their investments. The group predicts continued growth in foreign investment for 2016.

Secondary and Tertiary Markets

Although foreign investors still tend to focus on the major U.S. markets, stiff competition and rising prices have led some to explore markets that were previously overlooked. Some of the markets seeing more international participation include Miami, Atlanta, Chicago, San Diego, San Francisco, Seattle, and Boston. As it becomes easier for investors to identify and verify opportunities in multiple markets, we expect this participation to increase.

 

Foreign Investment in High Quality Assets

International investors favor high quality assets such as regional shopping malls, office and industrial properties and multifamily properties. They tend to prefer established, occupied properties, but there is some indication that foreign buyers are more willing to participate in development schemes. As the ability to make connections is accelerated by technology, these buyers can make short work of the required due diligence involved in this sort of investment.

The increased level of international participation in CRE markets is in part a reflection of our shrinking world. Barriers are dropping as business and government alike see the benefits of increased access to the market. Technology has been utilized to create specialized platforms that make transactions more efficient and transparent, and the exchange of information proceeds at a blistering pace. Each of these circumstances points to even greater opportunity for international CRE in the coming year.