NORTH AMERICA – Proposed changes to US tax rules governing investment by overseas pension funds in real estate could increase the appeal of cities outside the traditional gateway markets, CBRE Group has said.
Amendments to the Foreign Investment in Real Property Tax Act (FIRPTA) could exempt foreign pension funds from rules that see 10% of the property's sale price withheld until the capital gains tax has been paid to the Internal Revenue Service (IRS).
CBRE said the changes could potentially spur interest in central business districts (CBDs) outside the traditional gateway markets of New York and San Francisco, as the 10% withholding could now be reinvested directly without delay.
Jeffrey Kottmeier, CBRE's director of research and analysis, said that, outside New York, Washington DC was one of the gateway markets that could soon join a list of other cities that could garner the attention of investors despite drawing lower returns than the gateway destinations.
"The proposed FIRPTA changes could spur foreign investment beyond these traditional gateway markets to other core CBD markets like Chicago and Atlanta, where investment returns have historically been somewhat lower," said Kottmeier.
In a research note co-authored with managing director of Americas research James Costello, Kottmeier added: "The greater impact of FIRPTA changes could be increased clarity and transparency of doing business in the US."
He noted that countries such as the UK applied a single tax regime to both overseas and domestic investors, rather than the "varying sets of tax regulations, exemptions and withholding amounts" in place in the US.
"Having one, clearly defined tax structure would provide greater transparency to foreign investors completing real estate transactions in the US," he said.
However, he stressed it was as yet unclear whether the US Congress would pass the measures, proposed by president Barack Obama as part of his administration's 2014 federal budget.
The changes, announced by Obama in a speech on infrastructure investment earlier this year, were at the time welcomed by the Association of Foreign Investors in Real Estate (AFIRE).
The association called the White House's recognition that FIRPTA should be amended an "important step", but said it would view the announcement with "a little caution", as it had been proposing such changes for a number of years.