The American commercial real estate market has received a sizable shot in the arm from foreign investors in recent years, and indications point to continued growth there. With foreign capital representing about a quarter of all investment sales in the U.S., this activity has been important in enabling commercial developments here. As we settle into 2016, here’s a rundown of where things stand and where they’re likely headed.
Interest in the U.S. market is high across regions, with the highest levels of investment coming from Canada, China, and Australia. This hierarchy is shifting, though, as Chinese investment has surged over the past year with strong continued momentum. Regionally, the Asia-Pacific investors lead the field.
A factor driving increased activity is the lack of attractive options in the home country as well as some relaxation of restrictions on outbound investment. The U.S. commercial market continues to represent the most stable and secure investment option for many foreign buyers, although the European market is also likely to attract international attention. The Eurozone has stabilized over the last year and there are some distressed asset opportunities that will be attractive to investors.
Institutional investors with massive pools of capital to invest have helped to boost prices in primary U.S. markets, and foreign investors are looking beyond those to secondary cities like Seattle, Philadelphia, Miami, and Dallas.
The time seems right for international investment, with governments easing restrictions on both ends. Thanks to the Real Estate Investment and Jobs Act of 2015, the tax burden imposed on foreign investors by FIRPTA (Foreign Investment in Real Properties Act-1980) may be considerably lighter. FIRPTA’s original purpose was to discourage cross-border transactions, and it imposed heavy taxes on foreign investors. The JOBS Act goes a long way toward eliminating that barrier.
This legislation increases the percentage of publicly traded stock that a foreign shareholder may hold without incurring FIRPTA withholding and tax upon sale of the stock from 5 percent to 10 percent. It also exempts from tax certain gains on the sale of REIT stocks and capital gain distributions from REITs.
In addition, The Protecting Americans from Tax Hikes Act of 2015 (PATH) heads off the potential for tax increases down the road, and also makes it easier for foreign buyers to invest in development projects in the U.S. Price-Waterhouse recently outlined the changes that impact international investments in U.S. CRE.
These changes are expected to facilitate the flow of capital into the U.S. commercial market from global investors.
Pulling it Together
Overall, international investors are drawn to the U.S. market for safety rather than yield, attracted to the reliable, low-risk options to be found in our primary cities. Those who venture into the secondary markets are looking for better pricing and higher potential yields.
Meanwhile, foreign investment is driving up prices in major markets and competition for properties is high. Supply is not meeting demand. This opens the door for increased investment in commercial development projects.
On our end, facilitating foreign investment in the U.S. market requires establishing partnerships that are mutually beneficial and assist international buyers in navigating regulations and tax law. It’s critical to understand the objectives of these buyers, and offer expertise in local markets and regulations that help them to achieve those goals.