Interest in U.S. properties from international investors has been strong since the financial crisis, and the rate of investment has been accelerating in the last couple of years. We can see evidence of this in the industry news, and we hear stories from colleagues, but the full scope of foreign investment in American CRE is best demonstrated with a collection of statistics.
Read on for a snapshot of international activity in the market, and the factors that are helping to drive it. They may surprise you –at the very least they are food for thought.
Foreign capital is involved in twenty percent of the deals currently made on CRE in the U.S., with the heaviest investment coming from Canada, China, and Australia. Interest in international investment is surging, and pension funds around the world are looking to increase their allocation rates for real estate.
While figures vary, this is a reasonable estimate of the amount of foreign capital coming into CRE in the U.S. over the 12 months between July 2014 and July 2015.
By mid-year, the amount invested had already surpassed the entire amount for 2014 by nearly 100%.
This is the target average rate of allocation to real estate among institutional investors worldwide, according to a survey by Pensions and Investments. The study also found that Asian investors are the most likely to increase allocations, while North Americans are more cautious. The highest rates are found in Asia, where in 2014 allocations to real estate were at 10.9 percent, according to Cornell/Hodes Weill. Among European institutions they were 10 percent. U.S. institutions trailed at 9 percent. Implementing these targets would mean more than $500 billion in new capital aimed at commercial real estate globally, in a market that some suggest may see investments of $1 trillion annually in the near future.
Legislative developments play a large role in the level of international investment. One such development is the PATH (Protecting American Taxpayers from Tax Hikes) Act. This law, passed in December 2015, affects foreign investors in 2 major ways.
The law doubles the maximum amount of stock ownership that a foreign investor may have in a U.S. publicly-traded REIT from the previous limit of 5 percent to 10 percent. The law also permits certain foreign pension funds to invest in real estate investment trusts (REITs) without having FIRPTA tax treatment apply.
This is the amount of additional capital that some estimate will enter the U.S. CRE market this year as a result of changes to FIRPTA made in 2015. Many of these changes are laid out in the REI (Real Estate Investment) and JOBS (Jumpstart Our Business Startups) Act, finalized last year.
While the overall growth rate of commercial investment may moderate in 2016, favorable legislation and economic conditions in the U.S. will continue to make the CRE market attractive to international investors. Keeping an eye on the data can be key to identifying opportunities and weighing risk.