How International Issues Affect Foreign Investment in U.S. Real Estate

How International Issues Affect Foreign Investment in U.S. Real Estate

There’s no doubt that international buyers love U.S. real estate. In 2015, 15.4 percent of all commercial real estate buyers in the U.S. were from overseas, according to financial and professional services firm Jones Lang LaSalle.

On the residential side, the National Association of Realtors reports international buyers purchased 4 percent of existing homes sold in the U.S. in 2015, which made up 8 percent of the total dollar amount of existing homes sales for the year at $104 billion. The biggest foreign residential buyers in 2015 were from China ($28.6 billion), Canada ($11.2 billion), India ($7.9 billion), Mexico ($4.9 billion) and the U.K. ($3.8 billion), according to a study examining Chinese real estate investment conducted by the nonprofit Asia Society and real estate economics firm Rosen Consulting Group.

Foreign investors have long viewed U.S. real estate as a good place to diversify their portfolio and benefit from theworld’s strongest economy. But in recent years, hard assets in the form of U.S. property has also become an option to safely store money. “We’ve become what is today, I guess, the largest offshore loca- tion in the world,” says Ed Mermelstein, an international real estate attorney based in New York.

But what happens to an investor’s interest in U.S. real estate when international events affect his or her home country and lead to uncertainty over the future?

From economic meltdowns abroad to terrorism to squabbles over European Union membership, the growing international role in major U.S. real estate markets means we’re more likely to see the impact of those issues, says Ross Milroy, owner and broker at Ross Milroy Realty in Miami.

“The Miami real estate market – and I think New York is very similar as well –we’re so dependent on the international buyers, and they’re such a huge part of our market,” Milroy says. “A lot of our real estate markets do not follow traditional patterns, and a lot of our demand is dependent on what’s going on in those home countries of our buyers.”

 

“We’ve become what is today, I guess, the largest offshore location in the world,”

Ed Mermelsteinand, Managing Partner at Rheem Bell & Mermelstein, LLP

Mexico's Tourism and Foreign Investment Rankings Climb

Mexico’s Tourism and Foreign Investment Rankings Climb

Mexico got some good economic news this week on two fronts as new international surveys showed the nation moved into the world’s top 10 tourism countries and also boosted its ranking for U.S. foreign investment.

The United Nations World Tourism Organization (UNWTO) said Mexico had moved back into its list of the 10 most visited countries in the world. This is very good news, since tourism accounts for more than 8 percent of Mexico’s GDP. By contrast, oil accounts for only about 6 percent of GDP.

In this sense, increasingly the tourism sector becomes vitally important for the country, especially in a context of a strong dollar and weaker oil market. That is why the news released a few days ago by the UNWTO is so well received by officials and policy makers.

The Multifaceted Metamorphosis Ahead for Mexico's Energy Markets

The Multifaceted Metamorphosis Ahead for Mexico’s Energy Markets

The Mexico energy market has been a hot topic ever since late 2013 when the government decided to liberalize the energy sector, opening it up to foreign investment. The reform provides an unprecedented opportunity for international companies to participate in development of the nation’s vast oil resources as PEMEX unwinds its current monopoly. Multiple other opportunities exist in the power sector, in renewable development and in the natural gas pipeline sector.

The energy reforms were largely a result of the steep decline of the country’s oil production, inadequate financial resources to turn production around and an inability of PEMEX to keep pace with the technological change taking place in the industry.

Mexico ranks sixth in the world for non-conventional oil and gas resources, right behind Canada and Algeria, but lacks the financial resources to develop its reserves. It would take US$20 billion to extract the country’s reserves over a 210-year period and $87 billion to do it in 50 years. It also would not be possible to do this with one state-owned exploration and production monopoly — this is why the reforms were necessary.

 

Why Is Globalization Less Popular in Developed Economies Today While Latin America Seems Ready to Continue Its Embrace?

Why Is Globalization Less Popular in Developed Economies Today While Latin America Seems Ready to Continue Its Embrace?

There are two clear groups in Latin America: those countries in favor of free trade, mainly the Pacific Alliance (Chile, Colombia, Peru and Mexico), and hopefully Argentina, and those against free trade (the rest). In particular, Brazil has no free trade agreements. It has a closed economy, and although the depreciation of its currency aids commodity exports it has little effect on the country’s manufacturing exports. The divide between both groups can be explained by the experience individual countries have had: some have benefited more than the rest.

What’s the best way to achieve consensus about globalization with diverse interest groups as you tried to do in Mexico in the 1990s?

Free trade can be asymmetric in its distribution of benefits to the general population, and public policies should accompany free trade to make benefits more symmetric for all members of the soci-
ety. “Globalization imposes restrictions that have to be addressed with the adequate public policies.” As an example, Mexican states like Aguascalientes, Queretaro and Guanajuato (just to mention a few) have invested considerably in education and its population is generally in favor of globalization. In contrast, states like Oaxaca, Guerrero and Chiapas (among others) have done little investment in their human capital and are thus generally less in favor of globalization. Public policies matter and education should be a top priority to achieve consensus and for the general population to share the benefits of free trade. At a national level, Mexico now produces more engineers per capita than the U.S. (0.93 per 1,000 inhabitants vs. 0.75).

What’s the fix for the strong and sometimes distortive capital inflows that come with globalization?

I see three components. One: having a balanced budget that gives you the flexibility to have a small deficit or surplus when necessary. Second, a truly independent central bank that can adjust monetary and exchange rate policies to affect liquidity when necessary. Third, a flexible labor market in which it is relatively simple to hire and fire workers and in which compensation is based on productivity rather than being mainly fixed. It is also recommendable to have adequate public policies in place such as unemployment insurance for the general population to avoid the negative effects of such flexibility.

What can make immigration more acceptable in developed economies where many unskilled native workers are suffering from low wages?

An emergency training program for adults, handled at the municipal and state levels, in order to make it easier for them to either get employed again or to increase their labor income, would be one example. It is crucial to get the private sector involved in this process so that schools teach the skills that are actually demanded by the market. Mexican cuisine is a great example of the benefits of globalization, so in Mexico what food or drink would you point out to your kids as an example of the way they also benefit from globalization?