DC Is Improving Fast In The Eyes Of Foreign Investors
DC is moving closer to regaining a top five world city ranking for foreign investment after several years in the wilderness. That's one of the reasons we're excited to present our DC Economic Forecast and Real Estate Finance event on Wednesday, Jan. 27, at the Renaissance DC Downtown.
DC's comeback was the big takeaway from the 24th annual survey by the Association of Foreign Investors in Real Estate, which is fueling renewed optimism among foreign investors that is expected to continue through 2016.
Want proof? Last year was the first since the survey began more than two decades ago that no respondent signaled a planned decrease in its US portfolio holdings, notes AFIRE CEO Jim Fetgatter. That optimism comes despite the fact that 80% of respondents said it’s either very difficult (35%) or somewhat difficult (45%) to find attractive investment opportunities in the US.
Multifamily and industrial investments tied again as the leading choice of preferred property investments. Retail space has moved up a notch from fourth to third, while office investment dropped from third to fourth and hotels remained in fifth place.
After years in the top five best cities in the world for foreign investment, DC experienced a precipitous drop in rankings several years ago, due largely to federal sequestration, military downsizing, government contracting layoffs, and high office vacancy rates.
Those problems are behind us, Jim says. He'll be moderating our foreign investment panel at the event.
Foreign investment is again bullish on the DC market, which has climbed to No. 8 in the 2015 rankings, up from No. 15 in 2014. (New York retains its top ranking, ahead of London and Los Angeles.)
And in a comparison of US cities as investment targets, Washington ranks fourth—behind New York, Los Angeles and San Francisco—up from fifth place in last year’s AFIRE polling.
New institutional investors, from South Korea and China in particular, are fueling the renewed interest in US real estate.
Asian investors view the US as one of the safer areas of the overall investment spectrum, says Brian McLaughlin, CEO at Lantian Development. He and his Chinese partners recently purchased the 204-acre former Comsat campus in Clarksburg, MD, for $11.5M. He'll also be speaking at the Renaissance later this month.
He says Chinese investing practices are not monolithic. Like investors elsewhere, they differ in their approach to risk, assets, duration of investments and deal size. Whereas in China, the government owns the land, in the US there’s a predictable rule of law and fee-simple ownership.
“So as they look to invest in America, one of the things that rings loudest to them is the chance to own the asset,” he says. They know the US is a country where real estate is an appreciable asset and which has a stable currency, Brian adds.
A couple of changes to the Foreign Investment in Real Property Tax Act (FIRPTA) included in this year’s Omnibus Spending Bill corrected what Jim labels as some of the biggest hindrances to foreign investment and should further spur the international market.
Under the new legislation, foreign pension plans are exempt from the capital gains tax on the sale of property in the US, a change that will level the playing field with US-based pension funds, he says. Second, foreign investors that previously owned more than 5% of a REIT were subject to FIRPTA. Now that threshold has been moved up to 10%.
Offshore investments will continue to grow as a result of the legislation, AFIRE Chairman Frank Lively predicts. The FIRPTA measures, and whatever tax regulations stem from them, need to be further analyzed. But upon first read, he says, it seems that the environment for foreign investment "will only be further enhanced.”