This article is republished with permission from REITCafe.
The recent $12.8 billion bid by Anbang Insurance for Starwood Hotels and Resorts, even if it proves to be unsuccessful, highlights the ongoing flow of international capital into the U.S. real estate market. The United States is perceived as a safe haven for capital, especially for investors experiencing volatility in their local markets.
U.S. property market fundamentals are strong, and real estate values—even for trophy properties in top markets—are inexpensive compared with those in other world capitals. Returns for core U.S. properties in top markets can also exceed expected returns in other foreign capitals.
Changes adopted in late 2015 to the Foreign Investment in Real Property Tax Act (FIRPTA) are expected to bring additional overseas money to the United States. Foreign pension funds are now exempted from FIRPTA tax and withholding. The changes also increase the percentage of publicly traded stocks that a foreign shareholder may hold from 5 to 10 percent without incurring FIRPTA withholding and tax upon sales of stock.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2015 | End 2014 | |
| Industrial | 175 | 177 | 178 | 163 | 138.5 |
| Multifamily | 172 | 175 | 185 | 168 | 139.8 |
| Office | 182 | 183 | 164 | 168 | 148 |
| Retail | 175 | 177 | 177 | 168 | 139.8 |
| Average Spread | 176 | 178 | 178.75 | 166.75 | 141.5 |
| 10-year Treasury Yield** | 1.98 | 1.88 | 1.73 | 2.27 | 2.17 |
Other factors make foreign investment in U.S. real estate less certain. First, the strong dollar makes foreign investment in U.S. real estate more expensive and difficult. Global economic and political problems could limit funds available for U.S. investment. Sovereign wealth funds, which have been a significant source of recent U.S. investment, could pull back on foreign investment as the prolonged period of lower oil prices strains domestic finances and requires them to draw on their reserves.
China has been another significant source of foreign investment. Slowing domestic economic growth and the devaluation of the yuan have made foreign markets more attractive to investors. However, the central government controls the flow of capital and can limit outflows. Some investors are having a difficult time getting their money out of China, while others, like Anbang, continue to make U.S. commitments. In addition to its bid for Starwood, Anbang recently made a $6.5 billion deal to acquire Strategic Hotels and Resorts.
Foreign investment in U.S. real estate has several implications for real estate investment trusts (REITs). First, the changes in FIRPTA will increase foreign investors’ appetite for REIT holdings. It also has implications for property valuations and will affect prices at which REITs can buy and sell properties, especially for trophy properties in gateway cities that have been the targets for much of the international capital.
In January, the Association of Foreign Investors in Real Estate (AFIRE) announced that 64 percent of respondents to its Foreign Investment Survey plan modest or major increases in their investment in U.S. real estate during 2016. Other surveys have suggested that foreign investors are allocating less capital to real estate in 2016 than they did in 2015. First-quarter volatility has caused real estate investors to behave more cautiously, so the pendulum could swing either way as 2016 progresses.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** - 10 yr. Treasury Yield as of 3/18/2016.
