On the surface the US economy and business market is one of the most transparent and free markets in the world but if you dig a little deeper your opinion may change. For some time now the authorities have used an array of tax levers to reduce the influence of overseas investors especially those looking at the US real estate market. Initially seen as a move to reduce a growing influence in US real estate amongst Japanese investors, it actually goes back to the 1980s and concern about US farmland being acquired by foreign investors.
So, what has changed in the area of real estate taxes and will it make a major difference to the US real estate market?
Pension fund power
Pension funds have amazing wealth and influence in the world of real estate with some huge pension funds owning a massive part of the worldwide real estate market. Since 1980 the Foreign Investment in Real Property Tax Act has made it relatively uneconomic for international pension funds to invest a significant amount of their funds into the US. A mixture of reduced influence, increased national and state taxes saw many pension funds look elsewhere for their real estate exposure.
Overseas investment in US real estate
Cross-border investment in the US real estate market will top $78 billion this year and around $7.5 billion of this will come from foreign pension funds. This compares to overall investment in the US real estate market of a phenomenal $483 billion this year. When you compare this to a figure of just $4.7 billion from overseas investors back in 2009 it perfectly illustrates the growing influence and strength of the US real estate market.
Whether this could be seen as a sign of weakness/desperation by the US authorities is open to debate. However, the easing of tax obligations on overseas pension fund investment in US real estate should not be overlooked.
What can we expect in the future?
In tandem with the worldwide real estate market it has been a tricky few years for the US sector. However, let’s not forget that the US offers a massive variety of real estate investments across all states. This is exactly the scenario that pension funds enjoy with a long-term investment outlook and the ability to take advantage of not only “undervalued assets” but very significant rental yields. It will be interesting to see where the US real estate market goes over the next few years and indeed whether the ongoing increasing investment by overseas investors continues.
Can we expect more US real estate hotspots?
International pension funds have a very long-term investment outlook and it is highly likely we will see the emergence of an array of new US real estate hotspots in the not too distant future. Whether this is healthy for the overall US real estate market is debatable because hotspots never last forever and when investors leave, they tend to leave en masse. We can only hope that international pension funds also take into account some of the more rundown areas of the US where there is potential value in the longer term but short to medium term investors have little or no interest.
President Obama may just have injected more life into the US real estate market.