Offshore investors have been the US' major source of capital since the financial crisis and it looks like the recent step of the government to ease a 35-year-old tax on foreign investment will only open the door wider for purchases by overseas investors with President Obama already signing the measure into a law, Hui-Yong Yu of Bloomberg reports.
The US government passed the $1.1 trillion spending measure in order to evade a possible government shutdown and included is a provision that awards foreign pension funds the same treatment as their US counterparts for real estate investments. Under the 1980 Foreign Investment in Real Property Tax Act, foreign investors are imposed with tax - and the recent provision will deem that tax waived.
"FIRPTA has historically made direct investment in US property a non-starter for trillions of dollars worth of foreign pensions," said James Corl, a managing director at private equity firm Siguler Guff & Co. "This tax-law modification is a game changer" which could create hundreds of billions of new capital flows into US real estate.
Since the global economic meltdown, foreign investors have been attracted to relative yields and perceived safety assets in US real estate: from office towers, shopping centers, apartments, to warehouses. The said demand then resulted to record high commercial real estate prices. Most of the foreign investors were also able to bypass FIRPTA by making themselves minority investors.
From 5%, foreign pensions are now allowed to buy up to 10% of US publicly traded real estate investment trust with no strings attached to FIRPTA in this new law.
"By breaking down outdated tax barriers to inbound investment, the FIRPTA relief will help mobilize private capital for real estate and infrastructure projects," said Jeffrey DeBoer, president and chief executive officer of the Real Estate Roundtable.
This year, the US real estate market accounted a total of $78.4 billion cross-border investments which is 16% of the total property investments in the US at $483 billion, according to Real Capital Analytics Inc; and the $7.5 billion worth of pension funds is 10% of the foreign total, the firm added.
"Foreign pensions are such a low percentage of foreign investment in U.S. real estate because of FIRPTA," Corl said.
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