China Inbound Investing in U.S. Real Estate

China Inbound Investing in U.S. Real Estate

2016 Semi-Annual Update

National Audit Leader for Building, Construction and Real Estate practice, and U.S. Real Estate Funds Leader

KPMG in the U.S.

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Chinese investors have long looked towards U.S. real estate as a core investment as evidenced by the inflow of Chinese capital into the U.S. real estate market in recent years. The United States remains the principal place for Chinese outbound capital with the United States taking approximately USD10 billion of total Chinese inbound investment, of which approximately USD4.37 billion is invested in commercial properties.

“Chinese investment in U.S. real estate is a long-term phenomenon.  That said, over time, there will be periods of high volume investment and periods of low volume investment, which will be driven by economic conditions, availability of suitable investments and geopolitical considerations.”- Phil Marra, National Real Estate Funds Leader, KPMG LLP

China Inbound Investing in U.S. Real Estate—2016 Semi-Annual Update provides an update on the U.S. real estate market and in-depth looks at:

Six key U.S. markets

Provides a market outlook for each asset type—commercial (office, retail, industrial), residential (multifamily), hospitality (hotel)—for the New York, Los Angeles, San Francisco, Washington, DC, Chicago, and Dallas markets for Q4 2015 to Q1 2016 activities.

Forms of investments in U.S. real estate

How to invest in the U.S. real estate market explores buy or build, mergers & acquisitions, Joint ventures and strategic alliances among other considerations.
The U.S. market offers significant opportunities for foreign investors.

The continued strong demand from more than 310 million people for goods and services has resulted in a trade balance in the early 21st century that currently favors foreign exporters. But the business of exporting goods and services to the United States can be complicated by a host of duty and tariff-related challenges that often make building or buying a business in the United States a better long-term decision. The United States offers numerous financial incentives to build a business, and buying a business may be a cheaper alternative. But the decision whether to buy or build a business in the United States is also governed by a host of factors —geographic, demographic, financial and industrial— that need to be studied by foreign investors before making a commitment.

Tax implications
Under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), any foreign investor (other than a qualified foreign pension fund or a foreign entity wholly-owned by a qualified foreign pension fund) investing in a U.S. real property interest (USRPI) is deemed to conduct a U.S. trade or business and the gain or loss would be deemed to be effectively connected with a U.S. trade or business and therefore subject to taxation on a net basis.

Valuation modeling norms in the U.S.

Valuation considerations by asset type

  • Office: property is typically viewed as central business district (CBD) or suburban. When valuing office properties, investors typically rely upon the income and market approaches. Under the income approach, the discounted cash flow method is relied upon in most cases for multi-tenant offices.
  • Industrial: property can be classified as flex/R&D or warehouse typically. Investors tend to focus on credit quality and length of lease term to drive investment returns.  All three valuation approaches will be considered, especially in build-to- suit industrial properties that have minimal comparables.
  • Retail: property can be classified as strip-center, in-line, power center, or regional mall. Depending on what asset class within retail is being valued, inputs/assumptions can vary based on the quality of store/tenant. Typically, the income or market approaches are relied upon.
  • Multifamily: property can vary from market rate to low-income/ affordable housing. Student housing and senior living are sometimes classified as apartment/multifamily, but should really be considered outside of this asset class. Typically, the income or market approach will be relied upon given the short-term nature of the leases and availability of comparable sales, respectively.

The United States continues to offer significant opportunities for foreign real estate investors, especially compared to other markets worldwide, highlighted by positive albeit not robust, economic growth and a tax regime that welcomes foreign investment. This favorable marketplace, combined with Chinese investors’ interests in diversifying their investment portfolio globally, provides the ideal opportunity for all players, and the inflow of Chinese capital into the United States is expected to continue for the foreseeable future. But investing in U.S. real estate markets presents a variety of challenges—what markets and assets to pursue, what tax structures to create, how to value assets appropriately—that investors need to carefully consider to increase the odds that their investment efforts are productive.

For more details download China Inbound Investing in U.S. Real Estate—2016 Semi-Annual Update

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