IRS Ruling Benefits Real Estate Derivatives

The recent IRS ruling on FIRPTA (Foreign Investment in Real Property Tax Act) might change the domestic real estate and financial markets forever.  Real estate derivatives have been building a foundation over the last three years and with the benefit of this ruling, the financial markets are poised to make up lost ground.

The decision by the leading real estate brokerage firms to partner and establish a commercial real estate index looks promising.  For the first time, foreign investors will have access to individual market returns for New York City, Houston, San Francisco, Chicago and an additional 12 markets without the required 10% withholding tax.  The key part of this ruling is it refers specifically to real estate indices (such as the Rexx Index and NCREIF) as distinct from investment in the physical property. 

The IRS ruling should have numerous positive impacts. The current physical real estate market will have a boost in liquidity.  The tax ruling will promote the use of real estate indices for trading; this affords foreign investors the opportunity to hedge positions and increase investment in direct physical assets.  The financial services sector, in need of a new market, will have the opportunity to expand investment in real estate without equity market influence.  Real estate derivatives can provide the financial markets with an expanded global footprint on the largest asset class without an established derivatives market.

Established real estate indices are in place for the market for both individual and broad market returns.  Rexx Index, in partnership with the leading brokerage firms, is well suited for individual market returns.  NCREIF, S&P (MHP) and Moody’s (MCO) are positioned for broad market and sector returns.

Through the benefit of the IRS ruling, the foreign investor gains improved access to the real estate market in a variety of trades.  Structures are in place with ISDA documentation, trading on the CME and the recent announcement of the ISE Alternative Market auction platform should expand the market with added transparency and lower counter party risk.  Perhaps, Lehman (LEH), Morgan Stanley (MS) and Merrill Lynch (MER) can seize the opportunity and start the climb back.

Comments

[knight722]

Just what we need, even more paper shuffling on real estate.

[Just The Facts]

Yep, that one is going to save us all!



Did I understand it correctly?



It will allow foreign investors to sink their money into domestic real estate funds, but not to own the actual property?


Basically, to place a bet as to whether the values of US real estate will go up or down from here? All they need do is to send a check, first?


Welcome to Capitalism Casino!



LOL!

[johngonole]

I must confess that I've never really understood derivatives. Never really studied them either. Most people don't need to hedge yet derivatives are huge. I also think its just another way of creating more paper money that will be traded. If they ever implode.....It reminds me exactly of a casino. Only without the mobsters that will make you pay up. More likely the banks will expect another bail out from us taxpayers. If taxpayers are going to back the banks perhaps all banks should be privatized......Run away run away.