SAN FRANCISCO-The US economic recovery may be uneven across markets and product types, but US real estate is proving more attractive than its global alternatives. According to the Association of Foreign Investors in Real Estate, offshore investment in the US is on the rise among a mix of global investors.
Offshore investors are diversifying their holdings into US real estate—and in many cases, they’re making sizable investments. In a recent AFIRE survey 81% of respondents indicated plans to increase their US holdings, with 31% planning on a “major net increase.” And 71% said that improving fundamentals are making secondary markets in the US more desirable as well.
In connection with this increased foreign investment, many US funds, operators, and advisors are seeing increased interest in private REITs, which offer tax advantages over other investment structures.
Unlike corporations, REIT shareholders generally incur a single level of US tax. Depending on the applicable tax treaties between the US and foreign jurisdiction, the foreign investor may benefit further from reduced US withholding taxes on certain distributions.
While they can provide favorable tax advantages, REITs are subject to complex and strict ownership and operational rules as well as withholding tax requirements for foreign investors—all of which must be monitored on an ongoing basis. Still, many funds and operators seeking capital believe the increased complexity is worth the trouble; REITs can potentially enhance the after-tax yield to their foreign investors, making the opportunity more attractive and competitive than other entities seeking investment capital.
Given the additional flow of offshore capital and the growing appetite for US property, US real estate owners and foreign investors can both benefit by using private REITs. Though the National Association of Real Estate Investment Trusts has noted an increase in offshore investor sources, global capital strategies can change at any time. For now, investment in US real estate continues to drive strong demand, and exploring a private REIT could potentially enhance net investment returns and make a difference toward securing the capital to seed or round out an investment fund.
Lillian Chen provides tax services to real estate funds, REITs, developers, and operators, as well as to their principals and owners. You can reach her at (415) 956-1500 or [email protected]