Based on the transaction information and the companies’ reports from the markets, we can notice the difference in returns on real estate investment between Europe and the US. When choosing the target markets to which real estate investments are directed – the level of return is a critical component in choosing an investment path, in addition to the risk component – it is important to understand the market related situation.
What are the reasons for the differences in yields between Europe and the United States?
Strong growth figures and a decline in unemployment. Employment indices in the United States continue a long-term trend, for the sixth consecutive year, of a significant decline in unemployment rates. These figures, together with the consistent increase in employment rates and growth, create a situation in which there is a consistent rise in demand for residential real estate and growth in the occupancy rate of commercial real estate. Compared to Europe, which experienced a period of economic instability, the US market presents better data that affects both returns and growth in the value of investments of existing assets.
Federal tax cuts – the US government’s tax-cutting policy creates an advantage for financiers and an opportunity to leverage existing capital to make investments with higher profitability. This convenient taxation policy generates more demand for real estate investment in the United States. Rather than diverting capital out of the country for tax reasons. The channeling of these resources hampers the real estate market and increases the property of income-producing properties and commercial real estate.
The cost of the land component is relatively low and allows for locating relatively inexpensive properties with growth potential. The real estate crisis in 2008 significantly affected the real estate market and created a general crisis that caused a significant decline in property prices and the inability of many homeowners to meet the repayment payments for the mortgages they took. The houses, which were foreclosed by the banks, traded at a value significantly lower than the value of the purchase, thereby giving the banks an incentive to sell them very quickly. As a result, many properties were sold at very low prices. This is the background to the fact that as a result of the recovery, many real estate properties are making a significant return to its value, and as a result we see a significant increase in yields.
A wide range of markets and assets. The American asset market is abundant with wide range of assets – residential properties, residential rental complexes, commercial and industrial properties, logistics centers, information and communication centers and assets related to health systems. Along with the extensive activity of real estate funds, a wide variety of investment types, business models and of course competition are created, combined with the growth and capital data flowing into the US market, the real estate market presents an alternative with a lower risk and a relatively stable cash flow, when compared with other investment channels.
Base prices are low. The size of the market and the scope of the projects make it possible to streamline procurement processes, receive cheaper financing, and lower input prices. The cost of construction coupled with the relatively low price of the land component in the United States, coupled with a large availability of land reserves for construction and development, leads to a lower asset value than similar assets in Europe.
Increase in demand for single-family homes. The socio-economic conditions in the United States create a preference for moving to suburbs and single-family homes. An increase in the standard of living, combined with road systems and ownership of a vehicle, enables the exit to the suburbs and the purchase of an adjacent property. In addition, it is important to note the transition of baby boomers back to city centers and the expenditure of many single-family homes for young families who wish to upgrade their living conditions.
Realization of risk. The latest real estate crisis in the United States exposed the level of risk inherent to the American real estate sector and the financial system that finances it. Reliance on high levels of leverage, lack of adequate regulation on financing bodies, and the likelihood of economic instability are apparently embodied by the market, is reflected in the high real estate yields we see in the US market.
What is a trustee and why would I need one?
A real estate transaction is one of the most significant transactions, and it is usually the biggest deal a person makes during his lifetime. This is a complex process involving many factors, and of course significant funds, combined with financing and the transfer of ownership.
The complexity of the transactions creates a situation in which we need an expert to oversee the legal elements of the transaction on our behalf and to represent us and our interests to other stakeholders. Legal advice and representation are critical when executing a real estate transaction in a market that you are familiar with and its importance is even greater when it comes to real estate transactions carried out abroad.
Real estate investors require legal advice and representation, since they generally do not familiar and understand the relevant legislation in the target market, and sometimes, according to the requirements of local law, representation of an attorney is required during the execution of real estate transactions. Sometimes, in real estate transactions, investors seek to use a trust mechanism to execute the transaction and to represent them for the following reasons:
Supervision of a complex transaction that continues over time. During a real estate development transaction in which financial assets are invested in the construction or improvement of existing properties, an external mechanism must be set to supervise the implementation of the milestones of the project and to ensure that the legal and contractual obligations are carried out in practice. The interests of the purchasers are maintained throughout the period of execution of the transaction. In this sense, the use of trust reduces the risk of failure related to non-fulfillment of the contract and the uncontrolled transfer of funds during the project.
Representation in the local market. In the event of an investment in another country, the local presence of the investor or his representative is required in order to carry out the actions required by the law and the relevant rules relating to the real estate transactions. The trustee representing the investor performs in his behalf operations that require attendance and provides the relevant professional advice, using his market knowledge, in addition to be a relevant license holder in the local market, the trustee can perform such actions as contacting the authorities and entering into legal proceedings on behalf of the investor.
Activity through a third party. Sometimes, when working with other investors, the investor will prefer to act through a trustee in order to distance himself from actions that may create tension between investors (such as negotiating, buying and selling or clarifying rights). The trustee creates for the investor the desired distance from actual involvement in the transaction.
Anonymity. Acting by a trustee, minimizes the investor’s involvement in the activity. Investors, for various reasons, may be interested not to expose the fact that they are taking activities that include buying real estate or investing in international real estate. Sometimes, when it comes to activity within the community where the investor lives, he may not want to expose the fact that he is an owner of an asset or that he must conduct business activity that could harm relations with people he knows.
Procedural and tax related issues. Sometimes, the use of the trust mechanism may be useful for tax considerations. The most prominent example is the issue of the transfer of intergenerational property and the realization of inheritances. The management of assets in trust enables the definition of clear rules for the realization of assets and the transfer of assets in accordance with the rules of succession. Use of trust enables the imposition of conditions for the transfer or realization of property by heirs.
When it is necessary to use the trustee, it is important to choose the appropriate professionals in terms of their skills and experience and pay special attention to the formulation of the terms of trust – whether it is a single trustee or mutual trust. The contract must clearly define the terms of the power of attorney and the actions that the trustee may take, and so on. An clear definition of the terms of the trust prevents unnecessary risks in the future and reduces the probability of interpretation of the terms of the trust by the trustee or by other participants in the transaction.