Partial-interest transactions are rising in prevalence, according to new report from real estate services firm JLL. Despite last year’s changes to the Foreign Investment in Real Property Tax Act (FIRPTA) that lifted tax restrictions on foreign pension funds, which previously invested through partial-interest transactions to avoid taxation under FIRPTA, JLL predicted that these deal structures will continue to be popular.
The FIRPTA modifications do not apply to the bulk of foreign investors, including sovereign wealth funds, investment managers and insurance companies, which are driving the rise in partial-interest transactions, according to the Chicago-based firm’s new quarterly US Investment Outlook report. These deal structures made up 14 percent of overall cross-border transactions in 2005 through 2007, compared with 27.4 percent in the five-year running average, according to JLL.
The rise in partial-interest deals is expected to occur in tandem with an anticipated increase in cross-border transaction activity in the US. In its report, JLL said $463.6 billion was invested in US real estate in 2015, a figure the firm expected to rise to $510 billion in 2016.
JLL predicted this increase will be driven in part by low sovereign bond yields that have led investors to increase investments in alternative asset classes, particularly in US real estate. New York has benefitted from this shift, as the city surpassed London as the most active market globally in 2015 and became the highest recipient of cross-border capital. Within property types, foreign investors parked more capital in industrial real estate in 2015 than ever before. The US industrial sector captured 36 percent of offshore capital in 2015, and JLL forecasted that offshore capital will continue to diversify into other asset classes in 2016, particularly to multifamily and retail.
Meanwhile, the firm also projected that strong fundraising momentum in 2015 that will lead to sizable deals in the coming year. Real estate firms worldwide ended 2015 with $119 billion of dry powder, a 16.7 increase year-over-year. Much of that dry powder came from opportunistic funds, which comprised just over half of funds closed last year. Opportunistic funds raised $37.3 billion in 2015, compared with $14.5 billion in 2014.
“This expanding pool of higher return, offensive capital sitting on the sidelines will continue to expand liquidity for larger portfolios, entity-level transactions, recapitalizations and privatizations in 2016,” JLL said in the report.
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