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U.S. real estate could see more foreign investment ahead

Lawrence Lewitinn
Lawrence Lewitinn

U.S. assets like real estate may be more attractive to foreign investors in the months ahead.

In contrast to much of the industrialized world’s easy money policy, the Federal Reserve chose to tighten slightly with the start of a rate hike cycle on Wednesday. The divergence in monetary policy is seen as a potential source of volatility in the coming year.

According to Mitch Roschelle, partner at PricewaterhouseCoopers, uncertainty in global currencies, stocks, and bonds could benefit hard assets like U.S. real estate.

“Whenever there's instability in a society or in the world, investors tend to rotate towards the non-trading asset,” he said. “They rotate to real estate as opposed to the trading asset.”

China, which had a shaky summer, is taking an increased interest in U.S. real estate. About 8% of all foreign commercial property purchases have come from that country in the past 12 months, based on data compiled by Real Capital Analytics and PwC. China’s acquisitions are 5% of the total investments in the last 5 years. Yet China's total purchases in the past decade still don't make it one of the America’s top five buyers.

Instead, Canada remains the largest foreign investor in U.S. Our neighbor to the north is responsible for 31% of all overseas commercial property investments since 2010, representing 3.92% of Canada’s GDP while China’s American property investment is just 0.14% of its economy.

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“Investors in U.S. real estate tend to be our trading partners,” explained Roschelle. Year-to-date, Canada accounts for 15.5% total trade United States, making it the second-largest trading partner behind China’s share of 15.8%, according to U.S. Census Bureau data. In 2005, Canada was in first place, with its portion of foreign trade at 19.4% while China was in third place at 11.1%.

The relative strengthening of the U.S. economy compared to other countries is more of a reason why foreign money will continue to find dollar-denominated assets more appealing to foreign investors rather than the Fed’s recent increase in rates.

“The yield that those investors are looking for is really a long-term yield,” said Roschelle. “It's a belief in our economy and a belief in the ability of real estate assets to generate cash flow greater than inflation. So interest rates aren't really that important in the short term.”

He added that the dollar’s rise is really about an improving U.S. economy compared to the rest of the world, rather than just an increase in the interest rate differentials that is driving up the dollar.

“That's more reason for investors to flock for safety and defensiveness to the U.S.,” said Roschelle.

 

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