Asian schemes to benefit from tax-free route to US property – CBRE

Foreign pension funds will benefit from a new tax-free route into US real estate and infrastructure, according to CBRE.

Reforms to the US Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), cleared last month, mean foreign pension funds will receive the same treatment as US pension funds when investing in real estate and infrastructure.

Japanese pension funds – the largest such market in the region, with $2.9trn (€2.7trn) in assets under management as of 2014, according to Towers Watson – will potentially be a major buying force, CBRE said.

Pension funds from Australia and South Korea have previously invested in the US via joint venture and asset management companies.

CBRE said the new tax regime would encourage them to consider a more direct route to enjoy the new tax savings.

It added that previous tax rules under FIRPTA resulted in high transaction costs and had been cited as a major barrier for foreign investors looking to purchase real estate in the US.

The tax relief does not apply to sovereign wealth funds or insurance companies.

CBRE said the impact would be “more significant for Asian capital if they were to be extended to other foreign institutional investors” beyond pension funds.

“The US economic recovery is already attracting more Asia Pacific capital into real estate,” it said.

“But the new tax regime will help to support an increase in activity by pension funds.”

Pension funds accounted for 17% of the total turnover ($37.7bn) of Asia Pacific outbound capital invested into the US real estate market between 2011 and the third quarter of last year, with Australian and South Korean groups especially active.

However, other Asian pension funds will remain quiet, as most are still subject to domestic restrictions on direct real estate investment.

For individual Asian investors, the extension of the EB-5 visa investment immigration scheme will further support capital flows into the US.

CBRE said that, in 2015, more than $4bn of equity capital was invested in US real estate, including large commercial real estate projects, via the EB-5 programme.

Most EB-5 applicants were Asian.