Despite the higher volatility that has embroiled financial markets in the U.S. in the past few months following a calm 2017, foreign investors continue to pour money into the country’s real estate sector.
The real estate market has shown impressive resilience to changes in the broader economy and has long since established itself as a mammoth on the global stage. Even so, there is a question of why foreigners love to invest in the U.S. real estate market at rates that far outstrip other major countries’ inflows.
The answer is multi-faceted, including a combination of factors internal to the U.S. economy and the real estate market itself, along with external factors that have driven investors to look for better opportunities.
The US remains the world’s largest recipient of foreign investment across asset classes. More than $450 billion flowed into the country from cross-border sources in 2016, and a significant percentage of that came through the real estate market.
The global real estate sector is estimated to be worth just under $70 trillion, and the U.S. makes up 45%, or nearly $30 trillion in terms of investment opportunity. One of the largest reasons, despite the growing volatility in equity markets, is the relative stability of the american economy.
On one hand, the U.S. market exhibits high liquidity to accompany sentiment that remains largely positive, despite recent economic and political developments. This is appealing to investors in countries that may have more restrictive or limited markets, and especially for those looking for a safe-haven investment to hedge their portfolios or funds. This liquidity is also the product of market stability.
The U.S. for instance, has interest rates that have been steadily on the rise for the past two years. Compared to other major markets that have dipped into negative rates (Europe), the U.S. presents a valuable and reliable return on investment.
As investors and funds continue to allocate greater portions of their portfolios to real estate, the U.S. real estate market represents a highly liquid and low-risk asset class. With modern portfolios generally allocating 10 to 20% to real estate investments, the U.S. market is simply the most liquid and stable.
Additionally, relatively recent changes to regulations have liberated the market somewhat for foreign cash. FIRPTA (The Foreign Investment in Real Property Tax Act) expanded the size of investments foreigners can make, as well as exempting real estate assets held by foreign pension funds from being taxed by FIRPTA at all.
This is not to say foreign investors have a clear path to purchasing real estate assets; cross-border investments still face important challenges that must be considered before participating in the market.
On the other hand, foreign investors may be faced with either highly restrictive or uncertain investment environments at home, leading to a palpable need to diversify outside their borders. In Europe, for instance, ongoing financial turmoil has made investing in real estate in the continent less than a sure bet.
From economic growth that has remained relatively stagnant to the uncertainty still looming due to the UK’s impending exit from the Union, the continent’s real estate markets appear more unstable by comparison. Indeed, the UK remains one of the largest sources of real estate investment in U.S. markets.
In other countries, more restrictive laws relating to property ownership, capital limits, and other factors, lead investors to look for ways to off-shore their cash and assets.
This is clearly evidenced by China’s furious pace of investing in American real estate, which made up nearly 17% of all foreign real estate purchases in 2016.
Regardless of how the political situation in the USA evolves, real estate should remain fairly insulated and thus still attractive to foreign investors. The market’s liquidity and friendly regulatory environment make it a prime spot for foreign investors, and the numbers largely support this thesis.
As investors continue to experience double digit returns and low volatility alongside continually improving technology that delivers better access to foreigners, the commercial real estate market will remain a dominant destination for foreign direct investments and overseas portfolios.
Internally, the stability in the real estate sector and the significant returns every dollar provides, make the market highly attractive. Additionally, volatility in foreign real estate sectors — namely in places like Europe, where Brexit and general economic uncertainty dampen optimism — continue to drive away investors in search of safer havens for their cash.