US trumps Straya for Chinese property buyers

From Bloomberg:

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.

Contained in the $1.1 trillion spending measure that was passed to avoid a government shutdown is a provision that treats foreign pension funds the same as their U.S. counterparts for real estate investments. The provision waives the tax imposed on such investors under the 1980 Foreign Investment in Real Property Tax Act, known as FIRPTA.

“FIRPTA has historically made direct investment in U.S. property a non-starter for trillions of dollars worth of foreign pensions,” said James Corl, a managing director at private equity firm Siguler Guff & Co. “This tax-law modification is a game changer” 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. Many foreign investors structured their purchases to make themselves minority investors and bypass FIRPTA.

REIT Purchases

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“By breaking down outdated tax barriers to inbound investment, the FIRPTA relief will help mobilize private capital for real estate and infrastructure projects,” Jeffrey DeBoer,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.

Investment Surges

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.

Despite a perception that FIRPTA was a response to the wave of Japanese buying of trophy U.S. property in the late 1980s and early 1990s, including Rockefeller Center and Pebble Beach, the act was actually passed in 1980 in response to international investors buying U.S. farmland. Under old rules, foreign majority sellers had to pay 10 percent of gross proceeds from the sale of U.S. real estate as well as additional federal, state and local levies that could increase the total tax burden to as much as 60 percent, according to the National Association of Real Estate Investment Trusts.

The change “is a huge deal,” said Jim Fetgatter, chief executive of the Association of Foreign Investors in Real Estate. “There’s no question” it will increase the amount of foreign investment in U.S. property, he said.

An improving economy, easing entry regime, fully corrected and value-for-money property that is rising, great education system, rising currency and the home of freedom without Chinese strings attached.

If you don’t mind the off shooting it’s see ya, Straya!

Comments

  1. I didn’t believe you could get a bunch of politicans that were more willing to sell out their kids and grandkids futures than in straya, but the yanks seems to have left us in their dust.

    • Well…The USA has to give up something in exchange for all those toys, phones, nick nacks and other terribly important items they are buying from the chiese,,, so why not your children’s birthright?

    • The USA can absorb the new entrepreneurs and migrants. The US is dependent on innovation in its economy and has the top universities and the environment setup for it. Australia on the other hand only gets the lowest 10% of the migrant class who are looking for jobs and an entry into a western country. Most are US and Canada rejects who for some reason prefer Australia over the UK. They will take up local jobs without creating the industries. US is the magnet which attracts all the talent and they can make use of that.

      • If you are a foreign “student” in England, you must leave England within 4 months of completing your “studies”.

        Canada and AUS allow these law breaking, job stealing, “students” (immigrants) to stay for another 2-3 years after completing their “studies”!

        When will AUS grow a brain and kick out these “students” within 4 months?

    • @sydboy007
      Spot on — but there’s a big benefit -the Yanks are welcome to the Chinese Home buyers -hope they get swamped & the natives revolt.

    • Bloating up your exchange rate with unproductive capital is as damaging to the average American as it is for the average Australian.

      Productive capital is a different matter and because the US has managed at least in a few places to avoid turning land into a massive exercise in financial speculation they are more likely to attract brains and capital that is directed to productive purposes.

      Hard to see what productive benefit there is in allowing massive foreign investment in existing US housing.

      Strong whiff of Wall Street and FIRE sector ticket clipping.

      Must be taking advice from that Garage Sale spruiker Robb.

    • This certainly doesn’t help, but straya is way out in front when it comes to destroying the future.

  2. I just gotta Australia doesn’t get any ideas. Although the foreign investor issue has caused enough anger to make such a law harder here.

    But for American youth, struggling with their low income job recovery, it’s a nail in the coffin. I can’t believe governments can be so, not just stupid, but evil for pumping real estate again and again no matter how many times it brings down economies.

    • I think with IR going up, in order to prevent asset deflation they are allowing foreign money in to keep prices pumped up. That’s what it looks like to me…Seems we are moving in the opposite direction.. Hmm….

  3. I managed to convince a korean relative out of investing (legally) 2mil in Sydney. They were looking purely at investment not residency. Based on advice from reading MB, I warned about falling FX (80 USD at time) and talked about the many economic headwinds facing housing as described on MB. i.e. low yield, slowing population and economy while apartment building of low quality unlivable dog boxes booms, and how these apartments are sold exclusively to unsuspecting foreigners. They were dumb founded. Needless to say they switched to the US.

    • Nice work, but perhaps not a scalable way of putting off large swathes of clueless investors. I think many investors in China / Asian regions have been swindled by glossy sales brochures of properties in Australia thinking it’s a great investment. I wonder if they will have a sudden moment of clarity at the same time to get out of dog boxes in Sydney / Melbourne.. Hmm….?

    • interested party

      J,
      Don’t confuse “food” stamps with “nutrition” assistance. Wat day eat ain’t nutrition.

  4. This changes the rules for pension funds and the like, not for individuals (as far as I’m aware).
    The US is already completely open to individual foreign investment in residential property with no punitive taxation.
    Many US cities have highly elastic property markets, so any increase in demand will be met with new supply in those cities. Might cause problems in the less elastic markets though. The US residential property market is nothing like Australia’s.

    • Having just returned from San Francisco and New York I can tell you that the housing market in those two cities is as broken as Sydney’s. In San Fran rents tenants are “lucky” if their rents have only increased 30% and some are complaining of 60% rent hikes.
      The fortunate ones seem to be the thousands of homeless who pay no rent… /sarc

      • San Francisco perhaps, but not New York. Perhaps brownstones in the West Village are astronomical, but there’s a huge amount of housing stock located in close proximity to public transport that’s nowhere near as diabolical as Sydney. And food/ consumer goods are a fraction of the price.

    • Correct, but it is the narrative that is important not the actuals. The press from Australia is on forced sales from illegal foreign investment, cattle farm sale halted etc etc. The press from the US is “U.S. Eases 35-Year-Old Real Estate Tax on Foreign Investors”. Yes the devil is in the detail, but follow the logic of a Chinese “speculator” interested in their child’s future. Australia makes it hard for me to buy. Hong Kong is showing signs of slowing in property price growth. Now the US is relaxing laws, it must be good. Like Peter above, when you explain to a Chinese buyer the limitations of investment in Australia and the impact of a rising currency vs declining currency on the value of an investment over time measured in Yuan, smart money already moves to the US.

      This will be misreported on WeChat for sure, but who cares? If you explain that it now means the Japanese Pension fund can buy US real estate en-masse, it must be good for me because that will drive prices up and again, the rate hike US economy doing well narrative is stronger than the Australian economy divorced from China meme.

      It will be fun to watch the effects on US property prices and capital flows. Having owned in both the Boston and Raleigh markets, the effects will be very much localised to different regions, I would expect CA to suffer the most along with NY and eastern MA. TX maybe but hard to ND or MO or even CO benefitting. Seattle and Portland possible too

    • darklydrawlMEMBER

      Geoff W. Correct. Nothing has changed for individuals. Although it should make it easier and cheaper for deeper pocketed types to purchase – you are mainly talking pension funds and the like.

      It is already possible for individuals to purchase property in the US as a foreign national, although how easy / hard (economic / desirable) that is varies from state to state.

    • Yep. Atlanta never has a property bubble because it does not have zoning laws so you can build a house anywhere.

      A few cities in Texas, or the whole of Texas has no limits on sprawl so it does not have property bubbles.

      • I had a lot of fun working in Atlanta. ? We currently own property in Austin, TX.
        As you’re no doubt aware, you can buy a nice house in Atlanta or any city in Texas without taking on an eye watering mortgage. Skilled people living in US states that run good housing policy have a higher standard of living than similarly skilled people in any large Australian city.

      • Jacob, you raise an important point that someone should have said a lot more about already.

        Actually the USA has something like 100+ cities with freedom to convert surrounding rural land to urban use, and hence no property price bubbles. Increased foreign investment and immigration just adds to economic activity, including house building, adds to economies of scale and adds to agglomeration effects.

        The USA is becoming a “2 speed economy” – a few big-headed cities on both coasts, are turning into specufestor heaven, and hell for the real producers and workers and wealth creators, just like Australia. But within the US economy, a massive rebalancing helps the whole survive, which is a feature Australia does not have. Besides the Texas cities, virtually the whole of the South and the “rural” heartland is a haven for affordability, stable growth and real, non-Ponzi wealth creation. Check out good articles on the growth rates of cities; there are plenty like Indianapolis and Nashville and Salt Lake City that are right up there with the Texas ones.

        It should not be underestimated just how beneficial to a national economy it can be, to have a significant number of cities already at 1 million to 6 million population, growing at 10 to 20% per decade and sometimes even faster. It is all a matter of political will, what you make of this growth – it does NOT have to feed asset bubbles, create congestion, overload infrastructure, and it CAN “pay” rather than be a net burden. In fact a good history book like “Replenishing the Earth” by James Belich, points out the significance in economic evolution, of “growth itself”, which is the other pillar along with “exports”, in cities and nations rising to powerhouse status. The South and heartland of the USA is like a little Gaulish village still holding out against the contemporary theocracy where nature and resources are there to be worshiped rather than utilised, and showing the rest of civilisation how it used to be done.

  5. If you don’t mind the off shooting

    If this means ‘don’t mind the occasional shooting’ why would a non-resident property holder give two hoots?

    • well I can’t imagine a mass shooting in your new apartment building would do wonders for its value.

      • Fair enough.

        Are apartment buildings typical venues for such shootings? I thought schools and cinemas were far more popular, as there were far fewer locked doors to get past.

  6. This would suggest things aren’t improving in the USA. But if it takes pressure off us I don’t care.

  7. The US has social and economic issues but if you were looking to leave China and provide a better future for your family than why the fuck would you want to come to Australia. The opportunities are still endless in the US for those that have initiative. All Australia offers is a couple of highly over rated cities on the world’s driest continent. Our houses are mainly overpriced crap and not worth the money. Our education system is now second rate and the young have no future prospect. If i was chinese and had to choose between here and the US, the US would be a no brainer for myself and my kids. As someone mentioned previously the dumb money from china came here. The smart money went elsewhere but australia. The US amended laws will mean interesting times ahead for Straya ….

    • One of the few countries where balance between general safety, education, dole, jobs and wealth is well made – Australia. Sure a lot of things are deteriorating but focus is on balance.
      If you take any of the aspects alone (or cherry pick a few), there are other countries that are better off…

      Anyway, US of A is the last place on earth one should want his kids growing up.
      But an excellent place for adults

      • I grew up there and I’d bring my kids back from Australia to grow up there for sure. You have no idea what you’re talking about.

      • Kodiak,
        I understand you are emotional, growing up there.
        Probably I would be too.
        Emotions often or always obscure the view of (all) the facts.

      • It’s not emotion. I hated it at the time and I often still do, but at least I am educated about the differences. You are delusional if you think that there’s much of a difference between these places. Look at youth unemployment here and tell me how great it is to be young in Australia.

      • It’s not emotion. I hated it at the time and I often still do…

        * “Since [Michael] Brown’s death, at least 14 other teenagers—at least six of them African-American—have been killed by law enforcement in a variety of circumstances.”
        http://www.thedailybeast.com/articles/2014/11/25/the-14-teens-killed-by-cops-since-michael-brown.html

        * The dearest cheapest food in the world: it costs you your own health
        https://www.youtube.com/watch?v=EKqdL7A_aUI

        this is enough for me

      • You can’t extrapolate what it’s like to be young with tail end of the bell-curve crimes and little factoids about food. Organic whole foods at Whole Foods are cheaper than the crap at Cole’s and Woolie’s. You are wrong. And I suggest that your attachment to this subject is emotional rather than intellectual.

        Why is it that so many otherwise intelligent Australians have this keyhole mental illness when it comes to the USA? It really is the bete noir for many of you.

  8. An improving economy, easing entry regime, fully corrected and value-for-money property that is rising, great education system, rising currency and the home of freedom without Chinese strings attached.

    you must be kidding?
    I moved out to avoid my kids being “so greatly educated”

    and by fully corrected and value-for-money property that is rising you don’t think of places worth living in like CA, NYC, etc. that reached all time high prices again
    https://au.news.yahoo.com/thewest/lifestyle/a/30385661/average-manhattan-apartment-now-costs-over-1-million-report/
    http://www.sfchronicle.com/business/networth/article/Bay-Area-median-home-price-approaches-record-6454098.php
    http://www.seattletimes.com/business/real-estate/king-county-home-prices-up-136-percent-in-12-months/

    • Love the third example of King County’s alarming shortage of homes driving prices to a tad under $500K and condos jumping 19.4% over the year to $298,500. We can only wish for similar prices here.

  9. I love the USA, and would move there in a flash if it wasn’t for the fact we have young kids

    it is an amazing place…apart from the gun violence and the health system

    saying that, if you have wealth, the USA is unbelievable, and has a much more varied environment than Australia..

    I loved travelling around the deserts, the rockies and the sierras, and the coastline is just as amazing as ours

    tradies don’t cost a small fortune there too, unlike here

    I was amazed that parking in manhattan was actually cheaper on the weekend than in Brisbane…Brisbane!!!!

    likewise airport parking in SF airport was about a third cheaper than lil ol Brisbane airport….I mean come on

    shame that the AUD is going down…maybe time to earn USD in a few years

    • @Dan I’ve been over there a few times now, thanks to work. I sometimes consider moving there, but all my family is in Oz. I really do think staying here is financial suicide.. Earning USD over the next few years would be good.

      • @Gavin the E3 visa would be the way to go….

        I would never become an American, with the worldwide taxation thing, but they do have an amazing and varied country

        maybe we have it all wrong…we get cheap education (relatively) and pay a fortune for houses, and they pay a fortune for education and relatively little for houses (apart from the mega world cities like LA, SF< NY)

        our unis are not a patch on Stanford etc…truly amazing to walk around there, same as Columbia

      • Lived there for 11 years, know the ups and downs of America. Best legal system money can buy 🙂 A drug dealer on every corner. Cops filmed live on your streets every night. Great vibe in Miami and Boston. NFL and baseball games are out of this world. Anything is possible! Vassar, Harvard, Yale, Princeton, University of Washington, Woods Hole, Duke, UNC and so many more amazing schools (some have declined but many are still amazing areas to wander through). Some days I miss it and regret moving back to Oz, but it is such a diverse country – the Rockies, Appalachians, Cascades, Desert, plains, everglades, bayou, hill towns of West Virginia and North Carolina. Charleston.

  10. The US wants their slice of the laundered-money-pie.

    I predict stricter Chinese capital controls coming soon.

  11. wasabinatorMEMBER

    Was on the train with a Chinese colleague who’s been in the country a year or so. I was told in a matter of fact manner all the usual stories: property only ever goes up, property doubles ever seven years, cash is evil. All this education was provided by his mortgage broker. He’s levering massively in his market and moving the oldies over now to lever even harder. We’re completely screwed if the bullseye isn’t removed from Aus via moves like this in the US. They’re a massive economy compared to ours, so can absorb the increased speculation, for us given our tiny market, it has a much greater distortionary effect.