Why do high-net-worth individuals (HNWI) from outside the U.S. choose to invest in the U.S. real estate market?
At the conclusion of a recent networking gathering, a participant came up to me and inquired about this. We had a good conversation, and I thought it worth sharing my observations.
In my experience, the motivations behind a non-American/HNWI’s decision to invest in U.S. real estate can be broken down into four major categories:
1. Economic opportunity
First, and perhaps the most obvious, an international HNWI decides to invest in U.S. real estate because there are economic opportunities available ranging from the creation of income streams to capital appreciation.
2. Economic safeguard
Second, and still in the economic sphere, is that though higher yields may theoretically be available in local and international markets, the additional risk factor gives sophisticated investors pause.
They see the U.S. market acting as a good yield/capital appreciation hedge against riskier real estate investments in their portfolio.
Additionally, securing gains in U.S. dollars provides currency diversification. Illustrating both rationales, a slightly dated (2013), but still relevant survey by the Association of Foreign Investors in Real Estate (AFIRE) noted that:
“The U.S. is still considered number one for providing the most stable and secure real estate investments and it also represents the best opportunity for capital appreciation.”
3. Political safeguard
Although less publicly discussed, investment in U.S. real estate is a political safeguard for the international HNWI.
Despite the fact that we are seeing unprecedented wealth being created outside the political West (particularly in the BRICS countries — Brazil, Russia, India, China and South Africa) many of these new HNWI’s have an uneasy sense that the political system may not have kept pace with economic gains.
Consequently, many ask themselves whether they can be sure that their own wealth gains will remain free from direct or indirect political turbulence over the coming decades.
Publicly acknowledging this motivation is often difficult for HNWIs from outside the political West, but it is a reality often factored into any investment decision.
4. Hybrid: Economic/political and personal benefit
The fourth motivation is, as mentioned earlier, a hybrid one.
It is the alignment of economic and/or political considerations by the HNWI with the recognition that a property or properties in the U.S. could be personally useful as a temporary or permanent home.
To my mind, while there are other motivations for international HNWI’s investing in U.S. real estate, these four categories seem to cover the majority of this sector.
What is of interest, when the HNWI’s decision-making process is broken down into these overlapping categories, is that the U.S. clearly stands alone as the country that provides the desirable blend of political and economic security and economic “upside” coupled with the ability for a noncitizen to participate in the market.
Of course, there are challenges in identifying and securing a specific investment property, but my belief is that for the international HNWI, the U.S. real estate market is preeminent and should be incorporated into their overall portfolio.
Whether the individual investor is looking to invest $100,000 or $10 million or something in between, opportunities exist in the U.S.
The U.S. position as the international real estate investment destination of choice will certainly be challenged in the years ahead as other countries strengthen their governance structures, but what is less certain is how quickly that challenge will materialize.