The Appeal of U.S. Property to Foreign Investors

The benefits of foreign investment in the United States are widely recognized. U.S. real estate provides foreign investors with a diversification option that has a solid return without the volatility of stocks.

U.S. real estate is attractive to foreign investors for a number of reasons including its diversification, openness, size and selection. U.S. real estate is a good hedge against inflation and generally has a high return on investment. Real estate is a safe investment in what otherwise can be a rocky marketplace. Here are some additional reasons.

• Diversification: U.S. real estate offers foreign investors diversification of their investment portfolios so that their assets are not fully tied to the health of their domestic economy.
• Openness, size and selection: Foreign investors are attracted to the United States because of the availability of real estate as an investment and the ease of investing. The U.S. market contains a large supply of investment-grade real estate. It also has a relatively high turnover rate and easy exit option. In addition to the wide variety of investment options, the United States does not restrict or scrutinize most properties purchased by foreigners, as do other countries.
• Inflation hedge: Real estate investments, both residential and commercial, are less exposed to the effects of inflation than many other investments. In fact, the value of residential property in the U.S. tends to rise over time, more than the rate of inflation.
• Establishment of market share presence: Because the United States is the world’s largest and most open commercial real estate market, foreign firms and individuals want to establish market share here. They do this in a variety of ways, one of which is direct investment in properties.
• Safe asset: Certain U.S. investments are viewed as safe alternatives compared to what at times are more risky foreign assets. During periods of economic uncertainty in foreign markets, funds are often re-directed into U.S. assets that have low default rates such as U.S. Treasury bonds, high grade corporate bonds, U.S.-backed mortgage securities, and U.S. real estate.
• Liberalization of financial markets: In recent years, countries have allowed exchange rates to float. Many of the world’s industrialized nations have removed most controls on capital and restrictions on foreign participation in domestic financial markets. The U.S. economy offers an advantage to investors who want to be certain that they can get their money back after investing.
• Technological change: Telecommunications, computing and information technology now permit almost instantaneous transmission and processing of information around the globe. This capability lowers financial transaction cost and fosters a financial environment in which capital flows rapidly from one country to another, seeking the highest yield. As a result, foreign investors have greater and almost immediate access and can respond quickly to opportunities to invest in the U.S. real estate market.

A recent survey of foreign investors in real estate revealed the following:

“Which country provided the best opportunity for capital appreciation?” Forty nine percent responded the United States followed by Japan with 16 percent of the votes.

“Which country provides ‘the most secure and stable’ real estate investment”? Fifty eight percent responded the United States followed by the United Kingdom with 18 percent.

“Which country has the best ‘risk’ adjusted potential return from real estate investments”? Sixty seven percent responded the United States followed by the United Kingdom with 8.2 percent.

It is felt that the fundamental soundness of the U.S. market will continue into the future. Foreign growth will also continue as the U.S. market improves. In the long term, the return of new flows of foreign investment into the United States will continue to spur the real estate market toward new heights.