Financing for Foreign Investors

What The Current Situation in the US Means for Foreign Real Estate Investors

It’s fair to say that the Spring of 2020 will go down as one of the most consequential seasons in the history of the United States.

International investors have long regarded the US as a stable environment to seek robust returns and diversify their portfolios. US real estate has been a historic “safe harbor” for foreign capital.

In the last three months, however, the US has been rocked to its core with a geopolitical “one-two” punch:

  • The COVID-19 pandemic, which precipitated the horrible loss of human life and mass shutdown of the world’s largest economy.
  • Widespread civil unrest, kicked off by the videotaped killing of George Floyd in Minneapolis, at the hands of police officers while in their custody.

Foreign investors would be wise to ask “What next? What will happen to my US investments? Is there anything I should be doing differently? Should I sell my US property, buy more US property, or bide my time?”

Understanding the Crises

The Pandemic

Since the first US-based COVID-19 fatalities on March 5, the US has suffered more fatalities from the disease than any other country, with over 115,000 confirmed deaths.

Because the US suffered from a slow early response and a lack of equipment and testing capability, mass shutdowns of businesses were implemented, resulting in a 4.8% contraction in the US economy. Unemployment spiked from 3.5% in February to 14.4% in April.

Fearing a mass inability to pay rent or afford essentials like food, the US Federal government has rolled out $5 trillion in relief packages, the biggest spending initiative in US history.

The George Floyd Killing

In the midst of this crisis, on May 25, 2020, 46-year-old George Floyd, a black man and resident of Minneapolis, was arrested by police officers. While Mr. Floyd was immobilized in handcuffs, white police officer Derek Chauvin was recorded on video kneeling on Mr. Floyd’s neck for eight minutes and 46 seconds, while Mr. Floyd protested that he couldn’t breathe. Mr. Floyd died during those eight-plus minutes under Officer Chauvin’s knee, while three other police officers were revealed as doing nothing to help Mr. Floyd.

The killing touched a nerve in the society that has lingered since the period of US history when black people were held as slaves. High-profile killings of unarmed black people by the police have led to the controversial opinion that policing in America is endemically racist and in need of fundamental reform or even upheaval.

Protestors turned out en masse to demand change for policing procedures, under the popular anti-racist banner “Black Lives Matter.” Rhetoric has been heated on all sides, with protestors calling for measures up to and including “defunding the police,” opponents defending the police and decrying looters and left-wing terrorists in the protestors’ midst.

Most protests have been peaceful, but looting has been reported, while protester altercations with the police have resulted in injuries and fatalities of both police and protesters.

What This Means for Foreign Investors

It may seem like the US, historically a bulwark of stability is descending into chaos. What does this mean for foreign investors in US markets?

Remember that the US is vast and real estate markets are local. Where the property is located matters a great deal. For example:

  • While protests have died down in many cities, they continue in others. The Mayor of Seattle ordered the police to retreat from the Capitol Hill area, and the protestors have declared several city blocks the “Capital Hill Autonomous Zone,” claiming themselves to be a leaderless collective separate from the US. The fate of homes and businesses within this zone remains uncertain.
  • While the US has posted the highest number of COVID-19 deaths in the world, New York City was by far hit the hardest, with 14% of US total deaths falling on this one city alone. Investors with NYC property may face a long road to recovery, but deaths in the rest of the US have been much more disbursed.
  • Many cities and states have been quicker to open up their economies than others—notably Colorado, Georgia, Florida, and Texas. However, some cities have taken the COVID-19 crisis as an opportunity to remake themselves. The Mayor of Austin, TX, for example, has proposed a $10 billion transportation infrastructure project, to be funded by a 25% increase in property taxes.
  • Defund the Police” initiatives have taken hold in several cities, including George Floyd’s home city of Minneapolis. This could mean a more benign “restructuring” of police forces … but if defunded police forces lead to spikes in crime, property values could face decreases.

These are just examples. Foreign investors should carefully monitor protest and looting activity close to their properties. If chaos continues, state and local governments have the backstop of the National Guard and US Armed Forces to restore order if needed. However, President Donald Trump is very unpopular. The US government is historically stable, but it is hard to predict how the public would react to a Federal show of force.

A key concern for all US real estate investors is unemployed tenants’ ability to pay their rent. Federal aid checks have helped. Federally-backed mortgage banks Fannie Mae and Freddie Mac have been issuing forbearance on billions of dollars of loans, delaying debt service obligations for property owners … but on the condition that they not evict tenants for nonpayment during the forbearance period. Some tenants’ rights groups have called for a “rent strike” and widespread rent forgiveness, but without more Federal rescue cash, an eviction crisis may loom.

Of course, foreign investors are not eligible for loans from Fannie Mae and Freddie Mac, as well as mortgages from US banks. Many foreign investors buy all-cash and have no debt service obligation, making them uniquely better-prepared to weather a loss of rent revenue.

Should You Consider Buying in the US Now?

While this is a trying time for the US, its history of economic resilience and political stability bode well for the future.

The US economy unexpectedly added 2.5 million jobs in May, COVID-19 deaths are on the decline, and Derek Chauvin is facing murder charges. Many police officers have stood in solidarity with protestors, and bipartisan government coalitions have proposed positive steps to hold police to account, like an end to “no-knock” search warrants, widespread use of police body cameras, and an end to the doctrine of “qualified immunity” for police officers.

Of particular interest to foreign investors is the forbearance situation many current property owners find themselves in. Forbearance doesn’t forgive the loan repayments; it only delays them. Some lenders have not been as accommodating as Fannie Mae and Freddie Mac.

As the eviction holiday causes tenants to rack up crushing balances and an eviction crisis looms, many landlords already on the edge may come into distress. The next few months could present major US-based buying opportunities to foreign investors with access to credit and capital.

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