Foreign investment: A more efficient market plants the seeds of a vibrant ecosystem
Foreign investors continue to view U.S. real estate as a safe haven and prime investment opportunity. Indeed, in our work advising clients, we are seeing a market that is becoming, in fits and starts, more efficient. As we’ve noted previously, foreign investment has long been dominated by large investment groups and large banks. Smaller players existed, but had to surmount significant barriers to find suitable partners with which to collaborate spread across a truly global market. To put the challenge in concrete terms, how does a smaller bank in Dubai connect with the right local partners to do a deal in Dallas or Memphis?
Historically, the answer has been a combination of luck and persistence. But anecdotally, we are seeing more and more members of those large players leave to either join smaller firms or to hang up a shingle on their own. This reshuffling of networks is making it easier for smaller players to find each other and get to the once-elusive critical mass on deal flow. And at the $25 million or $50 million level that is too small to attract the interest of large investors, there is plenty of deal flow still to be had.
If this evolution sounds familiar, it’s because it’s a new telling of an old story in the real estate investment world—large firms incubating entrepreneurial talent that then creates a vibrant cohort of smaller, agile enterprises. Looking forward, it thus is easy to see the continued strengthening of foreign investment and the establishment of a vibrant foreign investment ecosystem, with a range of players concentrating their efforts on different niches.
Interestingly, there is the same lowering of barriers to entry in the aftermath of last year’s FIRPTA revision, which included an exemption for foreign pension funds. We’ve seen a number of pension funds from countries not traditionally involved in the U.S. real estate market begin to make their first moves here. Unlike the increase in the percentage of stock of a REIT that a foreign investor may hold while still qualifying for a tax exemption at the time of sale, the pension fund exemption benefits smaller participants as well, and the market is responding accordingly.
Looking ahead on the regulatory front, there is little expectation in the foreseeable future of further change to FIRPTA. A reduction in the corporate tax rate, however, would bring considerable benefits to foreign investors, as most foreign investment is conducted through U.S. corporations. But even with no regulatory changes, we expect foreign capital to continue to increase its presence on these shores.
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