Global Pension funds and sovereign wealth funds are reaching for yield in real estate as their previous asset class of choice — developed market government bonds — continues to produce low returns.
They’re hunting for real estate in Western countries with solid legal frameworks, tax efficient investment regimes and political stability. But cross-border deals have created something of a headache for governments worldwide.
One of the most high-profile repercussions came in August, when the Chinese government announced plans to restrict overseas investments in real estate and other assets. Property experts say that the decision was made in order to firm up Chinese currency and encourage investors to favor investments into domestic projects tied to the country’s “Belt and Road” trade initiative, an effort to increase economic and commercial partnerships across more than 60 countries through infrastructure development.
But it isn’t just in China where the global clamor for real-estate assets has prompted governments to keep close watch on regulatory policy.
Western governments are walking a tricky tightrope of their own managing capital inflows into domestic real estate. Politicians know that overseas real-estate investors are a good source of additional tax revenue. They also know that voters perceive investment from overseas as a big driver of real-estate price inflation.
In the U.K. this has led the government to carve out policy on property: The 2015 Finance Act requires non-U.K. residents to pay capital gains tax on residential property purchased in Britain, and overseas landlords must now pay tax on their rental income.
The U.K. government has “really upped its game” in the taxation of residential property, but investors in commercial real estate can still reap big tax benefits, according to Stacy Eden, head of property and construction at audit and advisory group Crowe Clark Whitehill.
“Someone investing in commercial real estate still benefits from a near-capital-gain-free tax position,” he says. “If they sell a property for a profit, there is a way to structure it, totally legitimately, to mitigate the tax bill. That is a huge benefit.”
A House of Commons Briefing Paper issued in July said that “a large proportion of these buyers are from Asia, primarily Hong Kong, Singapore, Malaysia, and China.” Investors from these countries have been attracted by currency fluctuations in the short-term, but also the “safe haven” status of London, according to James Beckham, head of London capital markets at real-estate services firm Cushman & Wakefield. Since the U.K. voted last year to leave the European Union, the value of sterling has dropped dramatically, prompting international investors to flock to the British Isles hunting a bargain.
Cross-border flows of hot money have also stimulated policy discussions in Europe, including France and Spain, where there’s increasing appetite for commercial business districts. “We have seen investors looking for value in markets like Madrid which have come back quite strongly in the last year or two,” says Beckham.
Meanwhile, the percentage of international investment in Manhattan has about doubled from levels seen between 2011 and 2014 to more than 50 percent this year, Avison Young said in a second-quarter market report in July. High-profile deals include the $2.21 billion purchase of 245 Park Avenue by Chinese conglomerate HNA Group and China Investment Corp.’s $1.03 billion investment for a 45 percent stake in a building at Rockefeller Center.