Trends in Cross-Border Real Estate Investment and the Changing Tax Landscape

London, 28 June 2017 – Tax changes have the potential to re-shape the nature of the U.S. and European real estate investment market, according to a report: Trends in Cross-Border Real Estate Investment and the Changing Tax Landscape from Hogan Lovells. The report, compiled by Hogan Lovells Global Tax Practice, examines recent developments impacting investment into U.S. and European real estate.

Real estate markets in both the U.S. and Europe continue to attract significant overseas investment. 

With interest rates at or near all-time lows, and dwindling returns in other asset classes, real estate has emerged as one of only a few reliable sources of potential returns and income for global investors. Interest rate increases in the U.S. may dampen moderately those investors’ enthusiasm, but a tightening of monetary policy in Europe appears some way off.

However, it is also clear that the structuring of cross-border investment is being impacted by tax reforms in the U.S. and Europe. These tax changes have the potential to re-shape the nature of the U.S. and European real estate investment market. The U.S. Congress and the new Trump administration envision far-reaching tax relief that would be broadly favorable to real estate investors. European governments are making a number of substantive changes to their tax systems, partly driven by international tax initiatives, but also looking to raise additional revenues from the real estate sector.

The first part of the report examines how proposed U.S. tax reform could play a role in shaping real estate financing structures and could influence inflows of capital into U.S. real estate. Under the early blueprints for U.S. tax reform, restrictions on interest deductions could negatively impact the after-tax returns of real estate investors, but the real estate industry would be likely to receive a significant boost from moves towards full expensing of the acquisition costs of U.S. real estate, further clarification on Foreign Investment in Real Estate Property Act (FIRPTA) changes and incentives to repatriate profits held overseas.

The report provides an analysis on the potential benefits and implications of the proposed reforms including: interest deduction and potential rate hikes, corporate tax cuts and the impact on REITs, border adjustment tax, like-kind exchanges, and the repatriation of foreign profits.

“Compared to other destinations for global real estate capital, the U.S. continues to be very attractive,” says Mark Eagan, head of Hogan Lovells’ U.S. real estate practice. “And the factors driving that are unlikely to change.”

The second part of the report considers the impact of European tax changes on real estate investment, and addresses trends in cross-border European real estate investment—including the emergence of new asset classes, the shift towards equity rather than  debt financing, and the rise of the REIT. 

"REITs will be a substantial part of the European property market going forward," says Elliot Weston, a partner in Hogan Lovell’s London office. "We are seeing the launch of more specialized and sector-focused REITs, and these vehicles offer a direct way for investors to put their money into particular classes of real estate".

While political uncertainty is elevated, investors have been paying a premium to secure the best properties. Competition for assets in Europe and the U.S. will remain fierce with interest coming particularly from institutional investors and sovereign wealth funds in China and the Middle East. 

Other investors eyeing real estate include family offices, argues Hogan Lovells’ Michael Dettmeier. “High-net-worth investors and families that have traditionally focused on the most secure fixed-income investments have not been able to earn the returns they require from those assets,” he says. “They are now looking more and more actively at real estate.”

Our research suggests that tax will impact on investment into real estate in a number of ways – increasing the after-tax cost of debt financing in some cases, providing tax drivers for the structuring of investments and bringing overseas investors further into the tax net of the jurisdictions in which they invest.

The report also includes commentary from institutional investor clients of Hogan Lovells on the real estate market. They conclude that a basketful of market factors — solid fundamentals, robust international capital flows, cheap access to capital, declining unemployment combined with ample labor slack and a supply-demand imbalance supporting higher prices — should combine to buoy real estate markets in both the U.S. and Europe.

About Hogan Lovells

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About Hogan Lovells Global Tax Practice

Hogan Lovells has a large global tax practice which consists of a combination of 120 lawyers, accountants and economists covering the full range of tax services for its clients.


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