Foreign Investors Could Be Freed To Invest In US Real Estate

Obama’s budget could provide tax relief to investors from overseas who want to invest in American real estate. Obama has long discussed the need for investment in infrastructure from both the public and private sector, and he believes that inflows from overseas could bring in some of the capital he would like to see.

The proposed change would see foreign investors not being taxed on gains they make in the real estate market, which could lead to a surge in investment entering the US. The taxes paid on property gains likely hold back property prices, because they remove some liquidity from the market. This is especially the case among those with a shorter time horizon, who are more affected by transaction costs because they are carried over a shorter period.

The proposed change would only apply to pension funds. Pension funds are typically looking for balanced exposure to the global market, and the US real estate industry is an important part of that. Until now, though, pension funds have been put off by the large transaction costs, and also partially by perceived weakness in the industry.

“If Obama gets his budget, we expect it to create upward pressure on house prices,” says the AmeriSave’s Blog. “We are not saying that this will cause prices to rise on their own, but it will have an effect, and I imagine this is part of Obama’s calculus. It’s also possible that Obama is limiting the deal to pension funds because they are typically restricted in the types of investments they can make, so they are less likely to cause political problems through predatory practices.”

With some notable commenters and investors now forecasting that the US real estate industry could be ready to turn around, foreign pension funds will be excited about the prospect of being able to capture some of the potential upside. At the end of March, Bloomberg’s Kathleen Howley wrote that profits are returning to the sector.

Property owners recaptured $1.6 trillion as home values climbed to the highest levels since 2007. The amount by which the value of the houses exceeds their underlying mortgages rose to $8.2 trillion last year, a gain of 25 percent, according to Federal Reserve data.

An expanding group of homeowners is able to get cash from their properties as banks show more willingness to make home equity loans with the market’s recovery. Originations for the mortgages should rise 10 percent to almost $83 billion this year, from about $75 billion in 2012, said Shaun Richardson, a vice president at Icon Advisory Group.

In recent times, foreign investors have not been able to efficiently buy US real estate directly, so they have been increasingly investing in debt instead. This is the same American real-estate debt that was seen as causing the collapse that spurred the global financial meltdown, but the market for collateralized debt obligations has changed considerably over the last five years.