The Big Challenges for Global Real Estate Investors
The Big Challenges for Global Real Estate Investors
Matt Malone, Privcap:
Hi, I’m Matt Malone from Privcap. I’m very happy to be joined today by Sean Bannon of Zurich Alternative Asset Management, Aureon Herron-Hinds from RSM, and Peter Merrigan of Taurus Investment Holdings. Welcome.
Unison: Thank you.
Malone: We’ll be talking today about the influx of foreign capital into the real estate market, primarily in the U.S. Aureon, what are some challenges that fund managers should be thinking about that perhaps they aren’t now, as it relates to structuring deals and other considerations?
Aureon Herron-Hinds, RSM:
I think there are about five things that funds should be thinking about when they’re structuring deals. I will focus, though, on maybe the top three more recent issues that I think funds should be considering on a go-forward basis. They are the Foreign Account Tax Compliance Act (FATCA) and the OECD Common Reporting Standard (or CRS, as we call it). Also, from a U.S. perspective, continuing to consider U.S. non-resident alien reporting and withholding requirements under chapter three of the U.S. Internal Revenue Code is still a big consideration with respect to withholding and reporting.
Going back to FIRPTA, as we call it—considering the imposition of attacks upon the sale of real property and what the implications are there is going to be important. I mentioned there is an expectation that there may be changes to FIRPTA with the Trump administration’s focus on tax reform. There is an expectation that there will be potentially a change in FIRPTA, that rates may decrease. We’re currently looking at a 35% rate, but there is an expectation that rates may decrease.
The second thing I mentioned—FATCA—requires disclosure of certain information about investors, reporting that information to the U.S. government via their local countries potentially withholding on certain payments that are made in the event it’s determined that the fund or the investor is not compliant with FATCA. This means that they either have not entered into an agreement with the U.S. government to report and withhold information or … that investor hasn’t provided documentation to the fund, establishing that they are compliant. They could potentially be subject to a tax as high as 30% on certain U.S.–sourced income.
Thirdly, I mentioned the Internal Revenue Code’s requirement under chapter three that non-resident aliens or non-U.S. persons be subject to 30% withholding on certain interest and dividends that might be generated from funds they’re investing in. On a go-forward basis, that has been around for a while. What we’ve seen with the U.S. government is increased enforcement of those requirements.
Malone: Sean, what are the other challenges faced when sourcing foreign capital?
Sean Bannon, Zurich Alternative Asset Management:
For us, whether we’re looking at internal balance sheets or external capital, it’s tax, it’s regulatory and it’s currency. I think there are some very reliable models, structural models, that work very well for certain types of investors that we can employ. From a regulatory standpoint, there’s obviously admissibility and capital charges to consider as we think about exposures and mandates. For us, right now, the big one is currency. If you take a look at what it costs to hedge currency in some cases, it is absolutely prohibitive. To see the attractiveness of even the very, very attractive risk–adjusted returns in the U.S., when you compare them to certain European currencies. For us, those are the three big ones we are currently dealing with.
Malone: Peter, what are some of the ones that you see as sort as a manager of a fund?
Peter Merrigan, Taurus Investment Holdings:
On the currency front, we don’t worry about too much about currency because our investors were really encouraging U.S. dollar exposure. It’s a long-term bet on the U.S. dollar. They have to make their individual decisions about whether they want to make that bet and the timing of that bet. We don’t hedge as a result for the foreign investors. If they choose their own hedging strategy, that’s a different topic.
In terms of other challenges we think about, one of the things that’s important is that when you borrow domestically, which we always do for our U.S. projects, there’s another set of regulations involved. Even if you don’t necessarily have everything in place for the fund, the lenders are going to require Patriot Act compliance and AML type of things. It’s going to be a requirement no matter what you do, so it’s best to get all that out of the way up front.
One of the other challenges we see is sometimes cultural. When you have investors coming from many parts of the world into the U.S., their cultural expectations or what they’re used to dealing with in a certain way in their own country sometimes influences their thinking and decision-making. That’s something we spend a lot of time working through. A German investor may look at the world differently than a Saudi Arabian investor, for example, or a Turkish investor. We do have to try to be cognizant of that if they’re in the same projects together.
Malone: From a practical perspective, how do you do that? How do you try and gain those cultural insights?
Merrigan: A lot of it is education and knowing your client, knowing your investor. We spend a lot of time trying to understand what their strategy is and what they’re trying to accomplish as a long-term goal, then putting them in the appropriate vehicles and the appropriate investments relative to that.