I don’t remember precisely where, so there’s no sense in trying.
Last November, down a stretch of road heading into downtown London just across from the Thames I see this grayish-white building that looks like Frank Lloyd Wright’s Fallingwater in Pennsylvania. There’s a good half dozen of them lined up along the river, looking completely out of place among the cranes that are busy constructing the next luxury high-rise. My Addison Lee driver tells me that the developer didn’t even bother advertising the homes to Londoners. It was sold entirely to the Chinese, he tells me. It’s their London ghost city.
You don’t need to go to London to see how the world’s globe trotting elite, some quite unsavory characters, have been behind the boom in super luxury real estate. Drive down 11th Avenue in New York along the Hudson and you will see them: new towers with their own architectural sex appeal, catering to multi-millionaires willing to fork over more for a property than any American would ever dream today.
It’s happening in New York. It’s happening in Boston with its new Millenium Towers, and it’s happening in Los Angeles, the go-to hot spot for hot Chinese money.
On Dec. 18, the U.S. started a process to make foreign ownership of American real estate that much easier. This month, it now becomes a tax obligation to foreign owners, which will help the Internal Revenue Service crack down on just who exactly is owning these properties.
I asked Millenium Towers who is buying up their million dollar studio apartments. It can’t be Bostonians, I believed. For a million, they rather have a place in the Back Bay or Beacon Hill. No one responded. Changes in the Foreign Investment in Real Property Tax Act of 1980 will make it easier for the government to know who owns what. Until then, it was quite easy to bring dirty money into American real estate. A large chunk of Miami has dependent on it for years, some in the business there tell me off-record.
But the real motivation behind the change in the Act back in December is a tax exemption that makes it easier (and cheaper) for foreign stock funds and REITs to buy American real estate. This also opens the door for institutional investors, particularly those in Europe, who are dealing with zero yield and negative interest rates and don’t have attractive options for capital preservation long term. Now they have a tax-friendly haven for moving money off shore in a tangible asset, like a high rise mixed-use dwelling in Manhattan, instead of putting it in low yielding debt, domestic equity or foreign currency bonds. With the outlook looking relatively dismal for stocks this year, foreign pension funds and investment firms managing real estate investment trust portfolios, will find a friendly market right here.
Note that this change comes at a time when New York is redrawing its skyline. There are at least four new commercial towers in the works downtown. And while I have not done the homework yet to see if any of those have foreign capital invested, projects like that can now more easily be rolled up into REIT portfolios with a larger number of foreign domiciled majority shareholders.
China’s Getting Nervous, Saudis Poking Around
Individual buyers and groups of individual buyers buying under Limited Liability Corps, or LLCs, have dominated the headlines on foreign real estate acquisition. On the investment firm side, Chinese life insurance firms like Anbang have been big buyers in New York, overpaying for a number of trophy properties, including the Waldorf Astoria and an office tower on 717 Fifth Avenue last February.
Since China opened up part of its capital account, companies and rich Chinese have been heading West, namely London, New York, Toronto, Los Angeles and Vancouver.
Rich Chinese, either inside the government or with their ear to ground, have been wary that China might surprise with a policy of capital controls. In a sense, it did just that last month when it banned certain foreign banks from trading in its currencyand, quietly, put a lid on “some Chinese nationals” aching to move money into American housing.HSBC, China’s biggest foreign owned bank, followed Beijing’s orders and put a stop in place on some mortgages.
It is unclear whether or not rich Chinese saw this coming and ran for the door, or if their fear that it was coming made them run for door and forced Beijing’s hands.
“During 2015, our firm transacted hundreds of millions of dollars in real estate transactions and many of our Chinese clients indicated that they were concerned that the window of opportunity to source Chinese funds in order to transact U.S. real estate investments was closing. It is noteworthy that in 2015, Chinese investors accounted for approximately $25 billion of U.S. real estate purchases – and it now appears that the Chinese government is seeking to curtail the flow of funds out of China” said Terrence A. Oved, Esq., head of the Real Estate Department at Oved & Oved LLP in New York.
Oved said that his experience with international real estate purchasers is that “ while some Chinese buyers have been tapering off lately, the Saudis on the other hand are active here now after spending billions in London.
How long before the Saudi sovereign wealth fund kicks a few million dollars into American real estate?
One never knows and it may have happened already. A number of European sovereign wealth funds from Finland, Norway and Sweden, are active in Baltic real estate. They’ve made Lithuania one of the hottest real estate markets in Europe. They are fleeing negative rates and putting money next door in Moscow and St. Petersburg investment funds.
By comparison, the U.S. sounds a heck of a lot safer. It has a stable government. It has a clear rule of law. The new rules may kick out some corrupt money looking to launder capital undetected during the sale. But for the most part, American real estate’s open door policy is one big, colorful welcome mat to rich buyers who are willing to do what most Americans no longer can do: overpay for housing.
The Rich Man’s ‘Sub-Prime’
Call it the rich man’s sub prime.
South Beach Miami’s Faena House is an 18-story hyper-luxurious penthouse going for a cool $60 million. Allow me this moment to go all real estate advert on you: The Faena Penthouse is adorned with 9 bathrooms, a 70-foot long swimming pool to enjoy after a workout in your own home gym and a gorgeous terrace wrapping around the privileged white hot views of America’s sexiest city, Miami. Realtors there tell me that the price shows consumer confidence in the market.
Not American consumer confidence. At least not in that kind of market.
The building is in the new Faena District in Miami. Guess who built it? The Faena family of Argentina and Ukrainian-born billionaire Len Blavatnik. Unless a young Hollywood celebrity or Rihanna buys it, the smart money is on a rich foreigner. Realizing a profit on this thing is moot. These are mostly money losing operations, and the independent buyer doesn’t care.
In other words, developers are building hard asset savings accounts…not housing and office towers.
They have built luxury real estate from Midtown to Downtown NY. Some people in the business estimate that as much as 75% of the homes inside are foreign-owned. Most are being marketed by foreign real estate agents with connections to people overseas looking to buy in the U.S. Even if they have no plans on living there, they all see it as a safe haven. It is unlikely that they can sell it at a profit in dollars, but based on where their money is coming from, its a profit in their local currency if one assumes dollar weakness over time instead of prolonged dollar strength.
The big risk is overkill. Developers may be getting ahead of themselves and institutional investors need to take note. Eventually, the markets where this money is coming from will improve. It may be five years from now. But it will happen. And when it does, developers will be sitting on empty buildings instead of half empty ones currently full owned — in the majority — by international buyers. An empty building won’t be returning rent and lease payments to REIT owners in that case. In the mean time, new construction from Boston to LA is keeping blue collar work available in major cities. It consumes steel copper and iron ore, of which the world is overflowing. Like anything else, this too shall pass.
- Source: Forbes Investing