Yahoo Finance How International Issues Affect Foreign Investment in U.S. Real Estate
There's no doubt that international buyers love U.S. real estate. In 2015, 15.4 percent of all commercial real estate buyers in the U.S. were from overseas, according to financial and professional services firm Jones Lang LaSalle.
On the residential side, the National Association of Realtors reports international buyers purchased 4 percent of existing homes sold in the U.S. in 2015, which made up 8 percent of the total dollar amount of existing homes sales for the year at $104 billion. The biggest foreign residential buyers in 2015 were from China ($28.6 billion), Canada ($11.2 billion), India ($7.9 billion), Mexico ($4.9 billion) and the U.K. ($3.8 billion), according to a study examining Chinese real estate investment conducted by the nonprofit Asia Society and real estate economics firm Rosen Consulting Group.
Foreign investors have long viewed U.S. real estate as a good place to diversify their portfolio and benefit from the world's strongest economy. But in recent years, hard assets in the form of U.S. property has also become an option to safely store money. "We've become what is today, I guess, the largest offshore location in the world," says Ed Mermelstein, an international real estate attorney based in New York.
But what happens to an investor's interest in U.S. real estate when international events affect his or her home country and lead to uncertainty over the future?
From economic meltdowns abroad to terrorism to squabbles over European Union membership, the growing international role in major U.S. real estate markets means we're more likely to see the impact of those issues, says Ross Milroy, owner and broker at Ross Milroy Realty in Miami.
"The Miami real estate market -- and I think New York is very similar as well -- we're so dependent on the international buyers, and they're such a huge part of our market," Milroy says. "A lot of our real estate markets do not follow traditional patterns, and a lot of our demand is dependent on what's going on in those home countries of our buyers."
Here are some of the most prevalent international issues affecting domestic real estate today.
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Economic Woes
What better place to seek financial stability than the largest economy in the world? For a well-off individual in a country facing economic meltdown, moving your money to a more stable economy can seem like a no-brainer -- and that's just what people are doing.
"They all understand that diversifying in international real estate over a period of time is proven to show greater return on your investment in your real estate portfolio than if you put all your investments in, let's say, the Mexican peso," Milroy says.
When the NAR surveyed its members in 2015, it found 75 percent of them believe changes in the value of the U.S. dollar influence possible purchases of U.S. real estate by international clients.
A stronger dollar, when compared to other currencies, makes it more expensive for foreign buyers to purchase U.S. real estate. When a country such as China or Venezuela experiences significant depreciation of its currency, suddenly it becomes difficult for them to buy American property.
But, if anything, economic trouble encourages a country's wealthiest citizens to invest in assets abroad when that option is feasible.
In an effort to reduce China's economic slowdown after multiple stock market crashes in the summer of 2015, the worst of which occurred that August, the Chinese government issued currency restrictions, including a law forbidding citizens from transferring more than $50,000 out of the country annually. As a result, Chinese investors interested in buying real estate abroad are unable to move their cash out of the country, and Mermelstein notes the last six months have particularly seen a change in U.S. residential property purchases with a decrease in Chinese investment.
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Politics
Playing a major part in international economies, political disputes between countries and even political unrest within a nation can have a ripple effect on overseas buyers acquiring properties in the U.S. These political situations can either make it more difficult for buyers to move wealth abroad or cause buyers to purchase a greater number of overseas properties, showing that they have more faith in another country's political and economic climate.
"There have been quite significant disruptions in international economic positions, whether they've been influenced by politics or in a significant way by the drop in oil prices. And each one has affected different regions in a different way," Mermelstein says.
In 2014, the U.S. issued sanctions against Russia for its aggressive actions toward Ukraine, and while those financial sanctions don't directly address real estate, Mermelstein says they affect many Russians' ability to invest in the U.S. market because the political atmosphere, combined with the drop in oil prices, has caused the Russian ruble to suffer significantly.
Harmel Rayat, a Canada-based real estate investor and author of "Winning With Commercial Real Estate," says he sees some international investors entering the U.S. market not for financial gain through return on investment but instead as a way to move money out of a country they may not politically benefit from anymore.
"A lot of that money isn't necessarily coming for yield. That money is coming for other reasons -- political reasons. They just want to protect their assets, get the cash out of their local countries," Rayat says.
Violence
The insecurities don't stop at economic and political fears. The threat of terror attacks in Europe and elsewhere are driving individuals to try to find a safe place for their assets in the U.S.
Milroy notes the recent bombings in Brussels and multiple terrorist attacks in Paris in the last year have led many European investors to seek stability for their investments, and possibly a place for them to stay, in the United States.
"All this terrorism has terribly affected a lot of people. I personally have seen more Germans, Austrians, French people and Italians [in Miami] in the last year than I have seen in 10 years," Milroy says.
What Does It Mean for the U.S. Market?
With so much of the world interested in holding a stake in the U.S. real estate market, any global issue has the potential to affect who enters or exits the market.
As an international investor with multiple U.S. properties in his portfolio, Rayat notes that some foreign buyers don't always make decisions based only on expected returns, but rather they're "using high-quality real estate as a Swiss bank account" to assure themselves safety and security.
As a result, this kind of international investment can artificially boost the U.S. real estate market, with investors more focused on gaining a foothold in the market than following property values or potential worth. "They're paying up for properties that in some ways don't make any economic sense -- certainly not to me," Rayat says.
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The lone constant? China.
Despite the Chinese government's moves to keep wealth inside the country, Chinese buyers made up the largest share of international purchases of residential real estate in 2015, totaling $28.6 billion, according to the study by Asia Society and Rosen Consulting Group.
Mermelstein notes that the China's economic problems may cause Chinese investors to slow their purchases for a while, but they will remain a big player among foreign buyers going forward: "We do expect that, long term, China is going to play a significant part in any serious investment coming from Asia in the United States."
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