On December 18, the United States of America started a process that focused on making foreign ownership of American real estate easier. This month, it becomes a tax obligation for foreign owners, and it will help the Internal Revenue Service to find out who owns these properties.
The real reason behind increased foreign investment — and the motivation for it — is the change in the Foreign Investment Act back in December. This change offers a tax exemption that makes it easier for foreign stock funds and REITs to buy American real estate. This opens door for institutional investors from Europe and other countries. They can now invest their money in a tangible asset, like a high rise mixed-use dwelling in Manhattan, instead of putting it in low yielding debt, domestic equity, or foreign currency bonds.
Chinese money becomes a part of U.S. real estate
The best part about this change is that it has arrived at the right time. The New York real estate market is changing, and it’s developing its skyline. China has been an important investor. Ever since China opened up its capital account, rich Chinese individuals and companies have been heading west. Their favorite cities are New York, Toronto, Los Angeles, and Vancouver. “During 2015, our firm transacted hundreds of millions of dollars in real estate transactions and many of our Chinese clients indicated that they were concerned that the window of opportunity to source Chinese funds in order to transact U.S. real estate investments was closing,” said Terrence A. Oved, Esq., head of the Real Estate Department at Oved & Oved LLP in New York. “It is noteworthy that in 2015, Chinese investors accounted for approximately $25 billion of U.S. real estate purchases — and it now appears that the Chinese government is seeking to curtail the flow of funds out of China.”
Another big investment comes from Saudi Arabia. Saudis have turned to New York after spending big billions in London. Upon comparison, the U.S. seems a safer market. The government is stable, and the rules of law are clear. If there is a chance of an entity laundering capital money, the new rules mean they might be kicked out. America’s new real estate policy is a big welcome mat for rich buyers who are ready to pay, or rather overpay, for American housing.
How long will the change stay?
Developers are building assets rather than housing. They have built an exclusive, luxury real estate where most of them are marketed to foreign investors, and as much as 75 percent is foreign-owned. Even if the investor has no plan to live here, he will treat it as a safe investment with smart returns. They might not be able to sell it at a profit in terms of dollars, but when you look at where the money is coming from, you can assume that it might be a profit in local currency. The only condition is that they are assuming that the dollar will weaken over time instead of strengthening. This is a big assumption but has a higher probability.
There is a big risk of overkill. Eventually, the markets where this money is coming from will improve, and then developers will be sitting on empty buildings instead of half-empty ones. But an empty building will not return rent and lease payments to REIT owners. The good thing is that this rapid construction is generating employment and consumes steel, copper, and iron ore.
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