President Obama recently approved a measure that will see a critical amendment to the tax law surrounding real estate investment in the United States, by foreign pension funds. Could it be the boost the real estate market and the economy needed?
For the past 35 years, there has been a measure in place under American tax law, that stipulates that any foreign investment in real estate on US shores must be taxed.
Already an attractive market
The US real estate market has been in favor for a while now, especially in the wake of global volatility and a sliding confidence in the stability of the Chinese economy. Seen as a relatively safer investment with assured yields, investors have dived into the commercial real estate market often resorting to retaining a minority stake to circumvent the limitations of FIRPTA.
Of the total of about USD 78.4 billion that has flowed into US shores from cross-border investment in the real estate market this year, pension funds accounted for a mere 10 percent. The USD 7.5 billion from foreign pension funds, is paltry when you zoom out to see the USD 483 billion investment overall in the US property market across segments. Industry specialists emphatically believe this is a direct result of the FIRPTA.
What’s changing for foreign pension funds?
The US government’s latest move is one that’s designed to give foreign investment in real estate a shot in the arm. Specifically, from the foreign pensions segment. Until now, under a US tax law called the 1980 Foreign Investment in Real Property Tax Act or FIRPTA, foreign pension funds did not see any breaks that their American counterparts did.
With the recently modified tax law in play, foreign pension funds will now be able to buy up to 10 percent of a share of any publicly traded real estate investment in the United States, sans the worry of tax burden under FIRPTA. This had been capped at 5 percent earlier, and the easing of this tax barrier is seen as a significant step in the right direction.
Trillions at stake
The administration made this change in a bid to give the real estate market a boost, potentially attracting trillions of dollars worth of foreign investment from foreign pension funds. Analysts believe that after the change, billions could flow into the real estate market in the United States buoyed by this latest modification. The inflow will be vital for infrastructure projects around the nation, as well for the entire real estate market in general.