Record High Residential Spending & Foreign Investments

Foreign Investments Manhattan New Construction

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The Real Deal recently reported that new residential construction cost has hit an all-time $12 billion high over the last year. Spending shot up 73 percent in 2014 to $11.9 billion, the former record even after accounting for inflation. Despite spending reaching new heights, the actual number of new units constructed in 2014 has not increased proportionally; units are being underproduced. Only 20,329 units were created last year, just 11 percent more than the year before, but far less than the 30,000 new units created annually between 2005 and 2008.

Production and labor costs have increased, partially accounting for such high construction costs. Additionally, land prices have gone up and city approval rates have lagged production rates. Since production costs are so high for these new units, most of the new units depend on the luxury market for success; they have to be top-of-the-line in order to profit.

Much of the success of the luxury market comes from foreign investment; in recent years foreign pensions have invested billions of dollars in New York City real estate. In 2014, total cross-border acquisitions of U.S. properties amounted to $39 billion. A newly proposed federal law would increase the appeal of investing in U.S. real estate even more. The law would amend the Foreign Investment in Real Property Tax Act (FIRPTA) to enable foreign pension funds to invest in U.S. real estate without having to pay capital gains taxes on the profits, and would also allow them to buy bigger stakes in U.S. Real Estate Investment Trends (REITs) without paying capital gains taxes, according to Crain’s New York.

Right now FIRPTA adds extra hoops for foreign investors to jump through by posing structuring challenges for how income and capital gains are taxed. “Passing an amendment to FIRPTA would unlock a significant amount of foreign capital that can be put to use for real estate development, improvements, and investments in New York City and across the nation,” said Steven Spinola, president of the Real Estate Board of New York (REBNY). As it is now, the Chinese have increased their investment in the U.S. by seven times in the last five years. The Chinese government is promoting outbound investments, and some analysts believe that the Chinese might invest about $50 billion into the U.S. real estate market in the upcoming years.

Amending FIRPTA would promote foreign investments even more. Based on how many foreign investments there are despite the current FIRPTA, it’s clear that this is a deep market. More investments will fund additional new construction, which is paramount since units are currently underproduced. Especially in Manhattan, new construction is necessary to keep up with the ever growing population. Foreign investors will benefit many U.S. sellers because they will get more value for their properties, since there will be additional competition among buyers. Now more than ever, NYC real estate is a solid investment.

 

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