Foreign Real Estate Investors Plot Their Return

As signs that the second wave of COVID-19 is beginning to wane and travel restrictions loosen, foreign investors are looking to return to the U.S., potentially driving up home prices in an already record-breaking market.

According to a MarketWatch article by Jacob Passy, foreign investment is at a 10-year low.

“These travel bans haven’t just hurt the hospitality sector—it’s also led to a significant downturn in international investment in U.S. real estate,” Passy said. “International buyers only purchased 107,000 residential properties in the U.S. between April 2020 and March 2021, a 31% decrease from the previous year, according to data released in July by the National Association of Realtors. It represented the lowest level of foreign investment in a decade.”

It is not just travel bans that are restricting foreign investments, but backups at consulates and embassies have limited the number of visas being issued. In addition, foreign investors are less likely to purchase property sight unseen, unlike many Americans during the pandemic who purchased properties digitally with the rise of video walkthroughs and 3D technology

“They are used to touching and feeling their investments, because for them, the U.S. is their safety net,” said Edward Mermelstein, Founder of One and Only Holdings, a New York-based advisory firm for high-net-worth investors. “For them to not be able to look at and experience whatever they’re putting their money into is a psychological issue.”

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According to Auction.com, the share of purchases by out-of-country buyers dropped from 12% in the Q1 of 2020 to just 8% in Q1 of 2021.

The downturn was especially prominent among the top buyers of U.S. real estate. China, Canada, and Mexico rank among the largest buyers of American homes and condos, but the dollar volume of investments from these countries dropped by 50% or more this year.

Markets on the East and West Coasts will benefit the most from the return of foreign investment, based on past investments.

“For the past 13 years, Florida has represented the top destination for foreign buyers, representing 21% of international purchases,” Passy said. “In 2021, California came in second at 16%, followed by Texas (9%) and Arizona (5%), with New Jersey and New York close behind at 4%. Where foreign money flows now that travel is easier, home prices will likely increase.”

“The travel ban likely contributed to an easing of demand from foreign buyers of U.S. real estate, but that didn’t do much to slow the rapid rebound in the U.S. housing market in the second half of 2020 and so far in 2021,” said Daren Blomquist, VP of Market Economics at Auction.com. “Adding the foreign buyer demand back into the mix will likely only add more fuel to fire of the already red-hot housing market.”

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While cities such as Los Angeles, Miami, New York, and San Francisco have traditionally seen the most foreign investments in the past due to their strong housing markets, Blomquist said he predicts that more money may be headed to single-family housing which has seen major growth since the start of the pandemic.

“I wouldn’t be surprised to see the investment thesis of foreign investors shift to more affordable, less dense inland housing markets given the pandemic-accelerated shift toward those types of markets and away from the higher-cost, denser housing markets on the coasts,” Blomquist said.

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