President Obama signed off on the new rules as part of a $1.1T government funding bill last week
Wealthy Chinese individuals are already the biggest buyers of US homes, and its insurers have bought up trophy assets like the Waldorf Astoria, but so far, some of the country’s biggest investors had found America’s property market blocked off by a 35-year-old US law.
Until last week.
As part of a spending bill signed into law by President Obama last week, tax barriers to investment by foreign pension and retirement funds into US property or real estate investment trusts (REITs) have been removed, making the US market much more attractive to Chinese investors holding as much as RMB 3.5 trillion ($540 billion) in funds.
The new rules also do away with taxes on foreign investors holding up to ten percent of the shares in US REITs.
Removing Barriers to Pension Fund Investors
Under the new rules, a 10 percent tax on gross proceeds from the sale of US real estate for foreign pension and retirement funds that was enforced under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) has been repealed.
The change in rules will have an immediate impact on pension fund investors globally, as well as adding a new set of potential bidders for large real estate platforms and trophy assets in the US.
Overseas pension funds have invested trillions of dollars into real estate worldwide, but non-US players have been hampered in the American market by the FIRPTA restrictions. Overseas investment into US property has already exceeded $78.4 billion in 2015 according to figures from data provider Real Capital Analytics, with Chinese investors accounting for more than $3 billion in the first three quarters of the year.
In China, local government pension funds had RMB 3.5 trillion ($540 billion) in funds under management at the end of 2014, and if domestic Chinese restrictions on overseas investment by these institutions are removed, the retirement funds could create another major new source of cash flowing into the US market.
Chinese Pension Funds Could Follow Insurers Overseas
Although pension funds in China are not yet allowed to invest outside the country’s borders, the path for these funds could follow the same route as the nation’s insurers, which were first permitted to invest overseas in 2012. Now Chinese regulations allow up to 30 percent of total insurance company assets to be invested in real estate and 15 percent into overseas investment.
If Anbang Insurance’s acquisition of the Waldorf Astoria deal is counted towards the 2015 total (it was announced in 2014, but received final approval in February) then Chinese insurers bought more than $3.9 billion in real estate through cross-border deals this year. That total represents a ten times increase from 2013, the first year of deals for mainland institutions, when only $388 million was transacted.
While mainland pension funds are still restricted to domestic investments at present, authorities have already begun liberalising the types of assets that these funds can hold.
In August this year, the State Council (the equivalent of the Cabinet) granted permission for local government pension fund to invest up to 30 percent of their net assets in stocks, equity funds and balanced funds. Prior to that ruling these institutions could only hold bank deposits and treasuries.
Reform of the finance sector has become a high-level priority for the Xi administration as it looks for ways to sustain economic growth in the face of a gradual slowdown in the country’s expansion.
REITs Also to Benefit
In addition to removing the barriers on pension funds, the FIRPTA reform also removed taxes on REIT investments by foreign individuals, corporates and institutions.
Under the recently approved bill, non-U.S. investors can now hold up to 10 percent of the shares in a publicly traded US REIT without having to pay duties under FIRPTA when selling the stock or receiving proceeds from an asset sale by the REIT. Current rules would trigger the FIRPTA provisions if an investor owned more than five percent of the shares in a REIT.
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