GLOBAL - Sovereign wealth funds (SWFs) have been dealt "a significant blow" by changes to the US tax regime, according to Steve Renna, president of the National Association of Real Estate Investment Managers (NAREIM).
The US Administration has introduced changes which mean SWFs are no longer exempt from taxation on their real estate investments in the US but are instead treated as commercial entities rather than government organisations.
"There are investors from China, the Middle East and from Norway, among others, ready to invest in the US - readier than their US counterparts - so the new tax changes hinder this investment at the worst possible time when US real estate urgently needs the capital." said Renna.
"Furthermore, under current legislation pension funds from countries such as Canada and Germany can invest in their home markets tax-free but when they invest in the US they have to pay tax," he continued.
The US administration has also "added to the burdens facing foreign investors in US real estate" by declaring some of their compliance and structuring techniques invalid.
"Investment in US real estate is penalized by a tax regime which burdens it with costly compliance and reporting requirements," continued Renna.
"This has been a problem in the past but when yields were higher the additional cost could be more easily absorbed. Since yields have fallen there is not as much of a cushion to absorb the costs of complex restructuring," he added.
Renna has also raised concerns that the Term Asset-Backed Securities Loan Facility (TALF) is too limited in scope to have the desired impact on the industry, according to the Washington DC-based official.
TALF was introduced in May and the feedback suggests that it is working well for most asset-backed securities.
"The industry certainly sees the TALF programme as the right programme," said Renna. "However, as the programme expires in June next year its scale is too modest for it to have significant impact on the industry. It takes a long time to put together good quality loans and nobody will take the trouble to put together TALF financing if the programme ends so soon," he argued.
The industry has asked for an extension of between two and five years but the government has so far only granted a six-month extension, so the industry is not prepared to invest the time necessary to make it work. And banks are not likely to start down this road unless the programme will continue well beyond June, said Renna.