Russell Investments has welcomed the reform announcements by US President Obama to abolish the Foreign Investment in Real Property Tax Act (FIRPTA) in order to attract foreign pension fund investment into the US – flagging substantial new opportunities for direct property and infrastructure investors.
FIRPTA is a US tax levied on foreign persons when they dispose of real property interests.
Russell recommends superannuation investors construct broad multi-asset portfolios designed to meet their specific investment objectives. Alternative investments, including direct property and infrastructure, locally and overseas, are important components of this multi-asset approach.
“Russell’s own multi-asset portfolios are continually evolving to take advantage of new investment opportunities as they arise,” said Andrew Sneddon, Managing Director and Portfolio Manager, Multi-Asset Solutions.
“The potential abolition of FIRPTA tax prima facie makes future investments in US real estate more attractive and we are currently looking to enhance our range of multi-asset portfolios with allocations to direct property and infrastructure in the US as well as Europe and Asia,” said Mr Sneddon.
Samantha Steele, Senior Research Analyst, Alternative Investments said, “While Australian institutional investors have long discussed the need to capture global property opportunities, it seems this tax announcement may be the tipping point which will see a more definite move offshore for many funds.
“US direct property and infrastructure provide attractive opportunities for Australian super funds as part of their global real estate / infrastructure portfolios. The increasing scale of Australian funds means they are looking offshore,” said Ms Steele.
In addition to revising its own multi-asset portfolios, Russell recommends funds update their asset allocation models to highlight the increased attractiveness of US direct property and infrastructure relative to other asset classes, if the reforms become law.
Traditionally many super funds have shunned this investment opportunity because the US tax cost is too large. FIRPTA can erode 35-40% of the investment income and is not refundable to the Australian super investor. This is far higher than the maximum 15% tax that Australian super funds face.
In Australia, Russell can advise Australian investors on offshore real estate / alternative investment through its ready access to the global team’s experience and insights, to assess whether and which US property and infrastructure investments are appropriate for its multi-asset portfolios.
Ms Steele said super funds looking for investment opportunities in alternatives should now consider the increased attractiveness of US property and infrastructure in after-tax terms. Equally, super funds that have relegated this asset class to ‘no go’ status for tax reasons should now reconsider.
“Prime real estate in the US has recovered strongly since the global financial crisis and is close to pre-crisis pricing. That said the asset class still looks cheap on a relative basis when compared to historical yield spreads versus treasury and corporate bonds.
“While capital appreciation may be moderating, investors should still be able to achieve 7-9% total returns over the next few years, much of which will be income. Positive tailwinds for the asset class are substantial demand, a dearth of new construction, low interest rates and benign inflation,” Ms Steele said.
In late 2011 Russell released a report highlighting Australian investors were planning to increase their allocation to global non-listed property by as much as 34%. The groundbreaking research was conducted by Russell Investments, the Asian Association for Investors in non-listed Real Estate Vehicles Limited (ANREV) and the Australian Institute of Superannuation Trustees (AIST). Foreign tax drag was highlighted as a key deterrent for 43.6% of investors in the 2011 Survey, with many particularly cautious about the US.
“Australians are savvy property investors, and are clear-eyed about the opportunity to diversify their property holdings and bolster their offshore expertise. However there are still numerous challenges and super funds will need to negotiate this new territory prudently,” Ms Steele concluded.