President Barack Obama signed into law a measure easing a 35-year-old tax on foreign investment in U.S. real estate, potentially opening the door to greater purchases by overseas investors, a major source of capital since the financial crisis.
Part of the new year-end spending bill included a waiver of the Foreign Investment in Real Property Tax Act (FIRPTA) which had been implemented during the late 1980s when the Japanese were buying everything.
They claimed to have focused on buying U.S. farmland, but it also applied to buying of trophy U.S. property like Rockefeller Center in New York City.
“This tax-law modification is a game changer” James Corl, a managing director at private equity firm Siguler Guff & Co, that could result in hundreds of billions of new capital flows into U.S. real estate.
Foreign investors have flocked to U.S. real estate since the global economic meltdown, drawn by the relative yields and perceived safety of assets from office towers and shopping centers to apartments and warehouses. The demand has helped drive commercial real estate prices to record highs.
Foreign investment has surged from just $4.7 billion in 2009, according to Real Capital. Foreign buying this year as a percentage of total investment in U.S. real estate is about double the 8.1 percent average in the 10 years through 2012.
The new law also allows foreign pensions to buy as much as 10 percent of a U.S. publicly traded real estate investment trust without triggering FIRPTA liability, up from 5 percent previously.
“By breaking down outdated tax barriers to inbound investment, the FIRPTA relief will help mobilize private capital for real estate and infrastructure projects,” Jeffrey DeBoer, president and chief executive officer of the Real Estate Roundtable, an industry lobbying group, said in a statement.
Cross-border investment in U.S. real estate has totaled about $78.4 billion this year, or 16 percent of the total $483 billion investment in U.S. property, according to Real Capital Analytics Inc. Pension funds accounted for about $7.5 billion, or almost 10 percent, of the foreign total, according to the New York-based property research firm.
“Foreign pensions are such a low percentage of foreign investment in U.S. real estate because of FIRPTA,” Corl said.
Read full story here via Bloomberg Business
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