Huge investment potential unlocked as Obama eases 35-year-old property tax
The US government has introduced a new measure relaxing a 35-year-old tax on foreign purchases of American real estate, a move many believe will encourage bigger overseas investment in years to come.
The measure, passed in December by President Obama, contains a provision that means foreign pension funds will be treated the same as their US equivalents for property investments. This provision waives the tax imposed on such investors under the 1980 Foreign Investment in Real Property Tax Act (FIRPTA).
“For more than 35 years, investment in US real estate has been restricted for a large number of foreign pension funds,” says Ray Hogan managing director of real estate company, Oryx World Portfolio. “This amendment means that overseas buyers can make much bigger investments, potentially worth hundreds of billions of dollars in total.”
Since the global economic crisis, American real estate has attracted international investors with its relatively high return on investment and perceived asset safety. This has skyrocketed commercial property prices and many foreign buyers have bought minority shares to avoid paying FIRPTA tax.
Foreign pensions can now also purchase up to 10% (previously 5%) of a publicly traded real estate investment trust without paying FIRPTA tax.
“By breaking down outdated tax barriers to inbound investment, the FIRPTA relief will help mobilize private capital for real estate and infrastructure projects,” says Jeffrey DeBoer, president and chief executive officer of lobby group Real Estate Roundtable.
According to Real Capital Analytics Inc, a New York-based property research firm, cross-border investment in US real estate totaled approximately $78.4 billion in 2015, representing 16% of the total $483 billion investment in US property. Pension funds accounted for approximately $7.5 billion, almost 10%, of the foreign total.
“The modification is big news,” adds Hogan. “It will unlock much greater investment opportunity for foreign buyers, including Oryx World Portfolio investors. In turn, this will make the US – Los Angeles included – an even more attractive destination in which to purchase world-class real estate with attractive returns on investment.”