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Property: Take a bite of the Big Apple

With everyone on tenterhook, it seems we can relax — for now, at least. President Trump’s tax proposal should tip the scales in favour of US property

As uncertainty rises with a new government in Washington and interest rates that have risen dramatically, it is no surprise that investors have signalled a note of caution

Whether you agree or disagree with him, there is no denying US President Donald Trump is shaking thing up. Often in unpredictable ways that leave observers and analysts across industries confounded. In this confusing environment, predicting the future or giving investment advice is, at best, an educated guess that comes with a few caveats. 

Real estate is among the key sectors of the US economy bracing for the Trump impact. Given the high volume of foreign investment, especially in New York, this sector is highly susceptible to what Trump proclaims — or tweets — on everything from corporate tax to immigration laws. As the New York Times summed it up in late April, “Though it remains unclear what impact Trump will ultimately have on foreign investment in the New York City real estate market, what is clear is that foreign investors are carefully parsing his policies and pronouncements.” 

As uncertainty rises with a new government in Washington and interest rates that have risen dramatically, it is no surprise that investors have signalled a note of caution

But, interestingly, their conclusions often differ. As the Times adds, “While uneasiness about broader changes to American immigration policy under Trump has some foreigners rushing into real estate investments in the US, other foreigners see the president’s hardline immigration rhetoric and tumultuous first months in office as reasons to hold off.”

So where does that leave affluent investors from the Middle East, who might be interested in picking up upmarket properties in the US? Well, it may not be firmly on the fence — Trump’s latest proposal to reduce corporate tax from 35 per cent to 15 per is likely tip the scales in favour of upping investments in the US. John Dworkin, an expert on taxation of foreign investments in US real estate, writes in the Saudi Gazette that the tax overhaul significantly impacts investors who hold their US property through corporations, even though the investors themselves may not be corporate entities. “Gulf-region investors are in a somewhat unique category with their investments in US real property made through corporations, which for several technical tax reasons is not expected to change,” he says. 

Consequently, any decrease in US corporate tax rates is expected to be of great interest to prospective foreign investors, including individuals, family offices and real estate investment funds. Dworkin concludes, “Thus, what appears to be a purely US tax issue may in fact substantially and favourably impact Gulf-region finance and investment trends towards the US market.”

Another point often touted is that the US is a stable economy, and whatever Trump says or does will not change that fact. In an interview with leading real estate news source Bisnow, Peter Jun, COO and Senior MD for investments at Washington DC-based real estate services firm Madison Marquette, points out that with growing uncertainty in Europe and Asia, the US remains a “very attractive” real estate market for global investors. Moreover, Trump’s interest in reducing regulatory barriers will only add to these strong fundamentals. “So far, the administration has said and done nothing to indicate that it does not welcome inbound foreign investment.” 

Jun predicts major urban gateway markets will continue to attract more foreign capital, while foreign institutional investors are also noticing well-located, high-quality assets in fast-emerging secondary markets.

Similarly, the Association of Foreign Investors in Real Estate (AFIRE) — which claims its members have more than $2 trillion in real estate assets under management globally — found in a recent 2017 survey that 95 per cent of the respondents want to maintain or increase their investment in the US. New York City continues to be the number one destination for foreign investors, followed by Los Angeles, Boston, Seattle and San Francisco. Surprisingly, Washington DC has dropped off from the top five ranking. Meanwhile, industrial property grabbed the top slot from multifamily, while hotels ended up as the least-favoured property type. 

However, this rosy picture does come with a thorn. The AFIRE survey notes that, despite investors’ intentions, 33 per cent of respondents felt their sentiment about the US market had become more pessimistic, 60 per cent fremained unchanged, and only 6 per cent considered themselves more optimistic. This is a significant departure from last year, when only 8 per cent had felt pessimistic. “As uncertainty rises with a new government in Washington and interest rates that have risen dramatically, it is no surprise that investors have signalled a note of caution,” says James A. Fetgatter, CEO of AFIRE, adding that investment criteria have become more selective and difficult. Going forwards, increased market research and discipline will be required.

Edward A. Mermelstein, a managing partner in the law firm Rheem Bell & Mermelstein, tells the NYT he has recently seen Chinese and Middle Eastern clients “pull back”, but he was confident they would not be deterred for long. “The president is not going to change the mindset of anyone buying at $5,000-$10,000 per square foot. As long as the rest of the world is in worse shape, we’re going to see continued investment.” 

Besides, given his past, real estate is apparently in Trump’s blood. As the paper notes, for many in the US real estate industry, this means Trump will “look out for their interests”. And, presumably, that of cash-laden investors from the Middle East and elsewhere. 

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