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.