PERE Dubai: US tax reform ‘could be the catalyst that tips this cycle’

As the tax overhaul plan moves forward in the US, executives speaking at PERE's Investor Forum: Dubai debated the effects on private real estate.

While US tax reform looks more certain, with the Senate looking to reconcile its version of the bill with that of the House of Representatives, the outcome for private real estate remains murky, according to speakers at PERE’s Investor Forum held in Dubai this week.

Och-Ziff president Steve Orbuch said lower taxation – although the final corporate tax has not yet been agreed – could catalyze macroeconomic growth, but his analysis for real estate is mixed.

“We think the corporate side will spur economic growth, which has been good for real estate. But on the personal side, it could cause redistribution of employment growth in high-price areas,” such as New York and cities in California.

The current Senate bill eliminates the deduction for state and local income taxes and would cap the property tax deduction at $10,000, which could make high-price markets less attractive for homeowners and top earners.

Fellow panelist Brian Ward, chief executive of Atlanta-based advisory firm Trimont Real Estate Advisors, said he was negative on the tax changes because he doubted they would boost productivity, among the Republicans’ goals in cutting corporate taxes.

“Maybe it has an accretive impact, but I’d say probably not. The supply-side thesis has never played out,” he said, citing little economic boost from previous tax reform efforts.

Ward cautioned that tax reform could also pressure the long end of the yield curve, which in turn increases cap rates.

“That could be the catalyst that tips this cycle,” he commented.

On the other side of the debate was Zahar Mejanni, Macquarie Capital‘s private capital markets head in Europe and Asia, who said he predicted tax reform would have a net positive affect on real estate, because it will increase capital repatriation and lower corporate taxes.

However, he said he did not anticipate changes to the Foreign Investment in Real Property Tax Act, mirroring earlier industry observers’ predictions. In late 2015, President Barack Obama signed into law Protecting Americans From Tax Hikes Act, which included significant reforms to the Foreign Investment in Real Property Tax Act. The updated tax code included stipulations about the types of pension funds that quality for a reduced rate, but those rules have yet to be clarified by the government. Neither Congressional bill includes FIRPTA changes other than conforming the withholding rates to the new lower rates provided in the bill.