By Stacy Rapacon
A February 2004 study released by the Association of Foreign Investors in Real Estate (AFIRE) indicated that foreign investment in U.S. real estate rose by 59 percent in 2003 and was expected to increase by another 11.9 percent in 2004. Survey participants have a global real estate portfolio with an approximate value of $250 billion, including a U.S. portfolio of $100 billion—15 percent of which is allocated to public real estate.
While foreign investors' current preferred real estate allocations are private equity and debt, James Fetgatter, chief executive of AFIRE, says respondents have maintained their growing interest in publicly traded U.S. real estate.
Top Ten
Foreign Investors
in U.S. Real Estate |
| Japan |
26% |
| Canada |
14% |
| Netherlands |
13% |
| Germany |
10% |
| U.K./Caribbean |
8% |
| United Kingdom |
6% |
| Netherland Antilles |
3% |
| Hong Kong |
1% |
| Singapore |
1% |
| Sweden |
1% |
Source: AFIRE
(% of foreign investment as of Dec. 31, 2003) |
"I think they were predicting that the yields were going to be less. They felt like the tremendous year for REIT returns [2003] could not be repeated," Fetgatter says. "But I don’t think that anybody has necessarily pulled out of the REIT market."
According to the survey, the U.S. received 60 percent of the vote for most stable and secure country for real estate investment. Fetgatter identifies this as one reason fueling foreign investment in U.S. real estate, along with REITs. "The U.S. economy is the most stable," he says. "And it is the largest real estate market in the world."
Fetgatter identifies Australia as the major up and coming player for foreign investment in U.S. real estate, despite their exclusion from the top 10 list due to not reporting to the Bureau of Economic Analysis, AFIRE’s source for statistics.
Foreign investment in U.S. REITs is often influenced by the tax treaties between the U.S. and a given country (see chart on page 67 for U.S. withholding tax rates on ordinary REIT dividends). For example, Paul Reeder of SNL Financial says, "One change that was beneficial to REITs last year were some technical changes in Japanese pension plan law that allowed investment in U.S. REITs."
Fetgatter agrees, citing individual countries’ tax treaties with the U.S. as a major reason for their attraction to U.S. REITs. "Double taxation treaties of specific countries allows certain tax-exempt companies to avoid taxes on REIT dividends," he says, identifying the U.K., Canada, Holland, and the Netherlands as examples.
On the global real estate landscape, the increase in number of countries offering public real estate vehicles has intensified the competition for foreign capital, Fetgatter says, noting Asia and Europe as other prime targets.
"They will make things more competitive," Fetgatter says. "The U.S. will have to be aware of that and make sure that we get our share of foreign investors and that our laws are favorable to foreign investors."
