If there is one thing the markets hate above all else, it is uncertainty. So, perhaps it comes as some relief that the question over the future of America’s leadership finally was answered this week.
As a number of real estate executives attending the annual PERE Summit in New York have noted, at least the industry knows what to expect.
Delegates acknowledged at the event taking place at the Sentry Center, that while the re-election of President Barack Obama may not be the result that private equity and real estate firms were hoping for, it nonetheless provided closure on the nagging issue of who will lead the world’s largest economy for the next four years, as well as offers guidance on how policy may affect the industry over that period.
Among the issues that private equity real estate firms may face in the coming four years are potential changes to the tax treatment of carried interest and the deductibility of interest payments on corporate debt. That issue, delegates know, has been ever present for as long as Obama has been in office, and there is no guarantee it will be addressed in his second term either. That said, should Congress undertake tax reform next year, there is a high likelihood that Democrats will try to close the carry loophole.
The deductibility of interest payments on corporate debt may be a lesser issue for private equity real estate firms, say experts. That is because much of the debt that the industry employs is mortgage debt, which is not part of the debate. For those firms that acquire real estate operating companies and use leverage to do so, this may be an area of concern. However, for the vast majority of private equity real estate firms, this issue is of little concern.
Still, other than potential tax changes, it is pretty much more of the same for private equity real estate firms. The elimination of the uncertainty surrounding US leadership should prompt those firms that were in a holding pattern to proceed with their strategy, at least until the next crisis of uncertainty rears its head.
In fact, doomsayers may not have long to wait as the US faces a ‘fiscal cliff’ if it cannot agree on a package of spending cuts and increased revenues by the end of the year.