Preferential Portfolios

Tax efficiency in international real estate investment

Real estate remains an attractive proposition for international investors. Whether that is residential or commercial property, the relatively attractive yield in comparison to more traditional investments such as bonds, makes real estate a key part of any balanced portfolio.

Global real estate is considered by many to be in a late stage of its cycle, with high valuations reducing potential yields. This cycle was particularly evident in the US during 2017, where sales of the commercial property fell by 8 per cent to USD375.6 billion, according to figures from Real Capital Analytics (RCA). This has been attributed to a reassessment of prices following three interest rate rises from the US Federal Reserve and an expectation of further hikes in 2018/19.

Another contributor to this investment trend could be the disruptive new ‘proptech’ companies which don’t play by the traditional rules, altering supply and demand dynamics and property usage. Examples include Airbnb, which enables long-term tenants to sublease apartments and Google, which is planning to develop its own city regions.

Rather than reduce real estate’s attractiveness as an asset class, however, this simply increases the need to make sure the investment is as profitable as possible. Investment in New York City might have tumbled by 32 per cent in 2017, but the search for yield has sparked significant interest in smaller real estate markets, where the potential for more profitable deals is greater.

Data from PWC’s Emerging Trends in Real Estate report for 2018, reveals that many of the top three cities for real estate investment in Europe, Asia Pacific and the USA are second-tier cities with growth potential.

In the US the top three are – Seattle, Austin and Salt Lake City, while in Europe they are Berlin, Copenhagen and Frankfurt. In Asia Pacific, investors are targeting Bangalore, Bangkok and Guangzhou.

The figures from RCA back up this renewed vigour for new real estate investment markets, showing that global sales volumes totalled USD873 billion in 2017, which represents a 6 per cent rise in Asia Pacific and an 8 per cent increase in Europe.

While the search for profitable real estate deals goes on, it is worth remembering that one of the best ways to improve yield is to ensure the investment is tax-efficient. When a cross-border investment is involved this importance is magnified. A clear understanding of how the jurisdiction you are investing in treats foreign investors for tax purposes is crucial, in order to assess and plan for income tax, corporation tax, capital gain tax, withholding tax and inheritance tax. Poor structuring can turn a potentially profitable investment into a loss-making one.

If tax-efficient vehicles, holding entities and funding methods are used correctly, they can shelter foreign investors from double taxation and dramatically reduce the tax burden, consequently increasing investment yields.

In the following discussion, we speak with IR Global experts from five jurisdictions and gain valuable insights into tax-efficient real estate investment in their respective home countries. Bob Blanchard from California takes us through the ‘blocker’ structures used in the US to shield foreign investors from withholding and inheritance tax, while Jayson Schwarz in Toronto, points out the benefits of using a Canadian non-resident Corporation (NRC).

Dirk Lehmann, in Germany, analyses the pros and cons of ‘double-dipping’ while Richard Ashby in New Zealand gives us a lowdown on the booming Auckland residential property market’s new ‘bright-line’ rule.

Finally, Gustavo Yanes Hernández in Spain helps us to understand the concept of permanent establishment and its tax consequences for real estate investment in Spain.