LUXURY OUTLOOK 2024 - Global Real Estate Regulations and Policy Trends: Shaping Investment Opportunities

A global environment and economy that’s more unpredictable than ever means that maximizing potential on real estate requires understanding and negotiating swift changes in foreign policy and investment rules.

Look no further than so-called Golden Visa opportunities: using property acquisition as a means to gain citizenship in a given country. Once prominent in Europe, these opportunities are dwindling. Portugal is phasing out the real estate investment portion of its program, and Spain may follow suit, according to multiple reports.

“The program created a lot of local demand in Portugal,” says Francis Greenburger, CEO of developer Time Equities Inc., “and without it that demand could be gone.”

The United Kingdom and Ireland have already closed similar programs. Although Indonesia is one of the newest countries to formalize a Golden Visa effort, it’s unclear if this will drive new investment given the geopolitical differences in the Asian nation compared with those in Europe.

To be clear, there is still plenty of capital changing hands internationally, especially when it comes to American-bound interest. The National Association of Realtors polled its members from April to May 2023 and found a total volume of US$53.3 billion of foreign buyer residential purchases from April 2022 to March 2023 (a 9.6% decrease from the prior period), with half of those buyers using their purchased property as a vacation home, rental, or both. The largest groups of buyers were of Asian and Latin American origin, with China representing the top stand-alone country, according to the report. California, Texas, and Florida were the three states with the most interest across most foreign groups.

The same report from NAR also notes strength in outbound interest, with a 7% increase in American buyers looking to a range of international locales for their next real estate purchase. Compared with prior years, American buyers are now showing closer-to-equal interest in Latin America, China, Canada, and parts of Western Europe.

While the overall international market remains robust, policy and regulatory changes are closely linked with real estate markets, driving investment decisions as a result.

The Correlation Between Regulation and Geopolitical Risks

Both 2022 and 2023 marked a higher period of geostrategic risk across the globe, most notably in terms of the wars in Ukraine and the Middle East, and increased tensions between the U.S. and China. These conflicts, in part, have led to the acceleration of new regulations and a shift in the flow of capital, such as investment in Dubai real estate. The United Arab Emirates has not imposed restrictions on Russian assets, whereas many others, such as the U.S, the U.K., and the European Union, have.

Plus, “there have been new rules and laws passed in areas such as financial data processing, state-level policies, and access to financial products,” says Marie Grasmeier, a licensed CPA in South Florida specializing in international business transactions. “An example of the latter is the U.K. Financial Conduct Authority’s Consumer Duty rules, which took effect in 2023.” These new guidelines are meant to streamline financial- product information, so consumers know exactly what they’re agreeing to and can get quick and efficient assistance from financial firms when they need it.

According to Jonathan Woloshin, real estate and lodging analyst at UBS, there’s a continued effort by the U.S. Treasury Department to curb money laundering with tougher rules around using anonymous entities, like an LLC or S Corporation, to purchase property, which may affect the flow of inbound real estate capital. Previously, these rules were specific to certain major markets such as Los Angeles, California or New York, but there is growing expectation that they will soon be rolled out nationally.

Buyer/Seller Concerns Through the Years

A look at what Sotheby’s International Realty agents pinpointed as the biggest issues facing their clients—from 2022 to 2024.

Source: Sotheby’s International Realty Luxury Outlook 2024 Agent Survey; Sotheby’s International Realty Luxury Outlook 2023 Agent Survey; Sotheby’s International Realty Luxury Outlook 2022 Agent Survey

“It is anticipated that title insurers would be responsible for reporting to the Treasury’s Financial Crimes Enforcement Network the identities of the beneficial owners of companies paying cash for U.S. real estate,” he notes in a recent company blog post.

While stricter regulations connected to geopolitical activity may be on the horizon, perhaps the largest unknown driver will be climate change. A rapidly changing environment will undoubtedly urge governments to consider more significant legislation requiring more climate-resilient construction and development. Thomas Scott, group head of real estate at international citizenship and residence firm Henley & Partners, cites a regulation in the U.K. that would have required all leased properties to meet a minimum energy efficiency standard by 2028.

However, as an example of how controversial these mandates can be, the British government rolled back the requirement in September 2023 as part of a larger “streamlining of work,” inextricably linking climate-related policy-making to the politics of the moment.

In certain natural disaster-prone areas such as the Caribbean (subject to the wrath of hurricanes) and parts of the American West (dealing with increased and more intense wildfires), a variety of resilience strategies are already under way—some voluntary, and others mandated by local authorities. In another example, Singapore’s strict and high taxation of foreign capital buying real estate is significantly curbing demand there, according to UBS’ 2023 Global Real Estate Bubble Index. It’s prompting higher rents as a result, and the index suggests that even more rent-driven regulations in the future could have an impact on the investment value of that particular market. As a key hub for Asian finance and trade, it’s an important country for real estate investors to monitor.

Interest Rates Still Driving The Conversation

“The big story right now is rates,” says Jonathan Kessler, head of credit and cash management solutions for PNC Private Bank.

Especially for inbound buyers looking at American properties, high interest rates—which have spent many months moving upward—are prompting buyers to consider alternative options for financing, such as a securities-based line of credit (which Kessler says is “one of the easiest and quickest options”), or even looking at intrafamily loans for high-net-worth families. He adds that currency considerations also come into play. The strength of the U.S. dollar in the past few years has made investing in dollar-backed properties less attractive.

The UBS Index notes that “average mortgage rates have roughly tripled since 2021 in most markets,” and that’s correlating to a pause in annual nominal price growth in the 25 large cities the index analyzes. Higher interest rates are eliminating most of the price gains of the past three years, and even dropping some markets to pre-pandemic levels.

Even in a cash-driven market like Dubai, which has seen price growth and a red-hot rental market in recent years, the UBS Index reports potential for weakening momentum into 2024. A fast increase in new construction and supply, and uncertainty around interest rates, could also lead to an overall slowdown. The ramping up of geopolitical tensions across the Middle East following the attack in Israel and subsequent war in Gaza also create question marks.

With This Much Uncertainty, Professional Expertise Matters

A normal transaction in quiet economic times is complex enough, but in the current climate of environmental and geopolitical turmoil, one of the clearest strategies to help minimize risk is by having a team in place to assist through any real estate expenditure, whether personal or investment.

International transactions often rely on tax treaties, which the U.S. has with more than 40 countries. But not all of those treaties are uniform.

“Americans buying overseas should consult with a professional who is familiar with international income-tax treaties and regulations for foreign investors, and it’s important to consider the Foreign Account Tax Compliance Act [FACTA],” Grasmeier advises.

FACTA was created as part of the Hiring Incentives to Restore Employment Act of 2010 and was designed to mandate foreign-asset reporting if it meets certain thresholds. FACTA is not administered by the Internal Revenue Service, but by the Treasury Department, and it covers assets such as real estate, cash, stocks, partnership interests, and precious metals.

For foreign nationals selling American real estate, the Foreign Investment in Real Property Tax Act (FIRPTA) requires careful consideration. Those investors looking for anonymity may find themselves being taxed twice on the same transaction in order to keep that privacy, according to Grasmeier. She also notes that FIRPTA requires 15% of the gross proceeds from the sale to be remitted to the Treasury Department at closing, with no regard to the cost basis or actual capital-gains tax liability.

With large transaction values, estate taxes can also come into play. This is where the teamwork of a qualified international accountant and estate attorney is crucial.

“It’s important to note that U.S. citizens and tax residents are subject to worldwide taxation regardless of where income is earned or where the taxpayer resides,” she adds.