Historically, the United States has been a leading choice among foreign investors in real estate. In 1995, there was a surge of foreign real estate investors, and between 2000 and 2003, there was another surge. In 2008, foreign commercial real estate became attractive again to foreign investors seeking a bargain on commercial real estate.
In general, the United States has been attractive to foreign investors. Though the United States is losing ground to Brazil in 2012, the country is continues to hold the number one spot in attracting global foreign real estate investors. During the economic housing recession, foreign investments helped to keep certain areas of the United States stable despite economic woes.
The State of Global Foreign Investor Market
According to Association of Foreign Investors in Real Estate’s (AFIRE) 20th annual survey, respondents held over $874 billion of global real estate. Three hundred and thirty-eight billion of the total $874 billion was invested in the United States. Foreign investors are choosing the United States over one-third of the time for foreign commercial real estate investments.
The opportunity is great for foreign real estate investing, but the conditions must be favorable in the eyes of the investors. Currently, the United States remains number one because there are few restrictions on foreign investments when compared to other countries such as China, Australia and Canada. The biggest impediment to buying property in the United States is the ability to obtain a loan and the ability to pay taxes.
Though commercial real estate investing in the United States is down 12 percent from 2011, there is still significant interest and opportunity. Most of the market share was lost to Brazil. Brazil holds the number two spot in foreign investments globally. In 2011, 64.7 percent believed the United States represents the best opportunity for foreign investments. In 2012, only 42.2 percent believed the United States would offer the best opportunity. Experts believe that United States will continue to hold the number one spot despite the decline in foreign investor confidence in 2012.
Which States Are Receiving the Most Foreign Investors?
This year, foreign investors have focused their efforts in major cities such as San Francisco, New York, Los Angeles, Washington and Boston. In these areas, housing prices are increasing and yields are decreasing.
In 2012, New York remains the global leader in terms of foreign investments. Washington is the third most popular location for global investments, and San Francisco was ranked in the number five spot. London held the number two spot, and Sao Paulo was ranked fourth in terms of foreign commercial investments.
San Francisco, in particular, is attractive to foreign investors and has improved its ranking from number 10 in 2011 to number five in 2012. Foreign investors are just one component to the San Francisco commercial housing market remaining stable in 2012. Stability keeps San Francisco commercial property prices high while other regions of the country remain low.
What Types of Properties are Foreign Investors Considering?
According to a recent study, foreign investors are considering apartment buildings in the United States. The multi-family unit has been at the top of the list in terms of foreign real estate investments for the fourth year. Because of foreign real estate investments, rents and occupancy levels are more stable than before 2007.
Foreign investors are also considering warehouse and distribution centers. In 2012, this is the second most popular investment. Last year, warehouse and distribution centers ranked fifth. Office properties and retail properties were ranked in the third and fourth positions, respectively. Hotels were previously ranked second and now, they are ranked fifth in terms of good investments.
Why is the United States a Leader in Foreign Real Estate Investments?
There are several reasons why the United States remains a leader in the foreign investments. One of the main reasons is there are no rules inhibiting foreign investment in the United States except in the event of national security. In this instance, the Exon-Florio law would take effect, and the transaction will be reviewed by Committee on Foreign Investment in the United States (CFIUS). Historically, less than 10 percent of foreign investments were ever investigated under this law. Though this law primarily relates to foreign investments in a company, similar reviews have been made in terms of real estate.
The United States is considered to be a safe haven for foreign investors. Since the fall of the United States dollar, the acquisitions are increasing in the United States. Tax laws are favorable for foreign investors. This helps the United States maintain good relationships with countries. Any capital gains earn on foreign investments may either be tax free or subject to a rate of 15 percent. The tax laws vary based upon the situation. Tax deferment opportunities are also available for foreign investors.
Not all tax laws are favorable. Foreign investors must do their research to avoid exorbitant taxes. Poorly advised investors may be subject to up to 65 percent tax on income, and inheritance taxes have been as much as 48 percent. While there are great opportunities in America for foreign investors, they should research and invest wisely. For the most part, the United States tax laws are written to encourage foreign investors to buy instead of discouraging them.
How Will the Repeal of the 1980 Foreign Investment Act Affect Foreign Real Estate Investments in the United States?
The Foreign Investment in Real Property Tax Act (FIRPTA) is one of the few impediments to foreign real estate investment. The law was originally designed to prevent foreign investors from buying farm property. This tax requires foreign investors to pay domestic and United States taxes when selling an investment. The only exception is if the United States has a taxation treaty with an investor’s home country. FIRPTA states that this tax penalizes foreign investors unfairly. FIRPTA has lobbied for change under the grounds that double taxation does not apply to foreign investors buying United States stocks and bonds.