1 Subject: Investment in real estate in New York City and factors Topic: Factors that influence investment in real

estates in New York City Question: What are factors that provide the foreign investors to invest their money to real estate in New York City? Thesis: Diversification, big amount of money, exchange rate and quality of life are factors that influence foreigners to invest in real estate in New York City Abstract: With the economic crisis in the U.S., Americans are worried about investing in real estate while foreign investors feel the U.S. real estate market is very enthusiastic especially in New York City. According to an annual survey taken by the Association of Foreign Investors in Real Estate (AFIRE), the U.S. rose to the top of the real estate market world. AFIRE members hold more than $627 billion of global real estate, including $265 billion in the U.S. About 72 percent of the respondents planned to invest more money in the United States in 2011. Based on the foreign investors in real estate in the U.S., the research evaluated the factors that influence the foreign investment in U.S. real estate.

Outline of the Paper

1. 2. 3. 4. Introduction Foreign Investors Taxation When to Invest in Real Estate Factors that Influence Investing in Real Estate in New York City 5. 6. Big Amount of Money Diversification Exchange Rate Quality of Life

Conclusion List of References

Introduction
When the economy goes down, many people avoid investing in business especially investing in real estate. This is because when investing in real estate, investors have to take a high risk and it cost a lot of money to start business. Thus, some people change to sell their properties instead of buying or investing in real estate when the economic crisis has happened. One of many reasons is investors concern that consumers will save their money and spend less than before, so they are afraid that their properties cannot be sold at this time. Normally, people invest in real estate when real estate markets boom because it is benefits for both investors and consumers. They both get profits from business but sometimes doing business is difficult to predict. Everything will go up and down. Nowadays, many countries suffer with the problem of economy including the United States, which is the most powerful and stable market in the world. The unemployment rate and commodity prices increase while people decrease spending money. In contrast, the real estate markets are very enthusiastic. In 2011, the poll by the Association of Foreign Investors in Real Estate and the Graaskamp Center for Real Estate at the University of Wisconsin revealed that about 72% of those polled planned to invest in the United States. According to the poll, New York City was the top of the rank followed by Washington D.C. The increase in investment in real estate came from many factors including diversification, big amount of money, exchange rate and quality of life.

Foreign Investors Taxation

The Foreign Investment in Real Property Tax Act (FIRPTA) was established in 1980 to ensure foreign investors pay tax on real property interest. Foreigners taxable U.S. estate includes real property but excludes some intangible properties. In order to do this, FIRPTA taxes 10% of the sale prices. The seller can reduce 10% of the amount of taxes by applied to the Internal Revenue Service (IRS). Foreign owners of real estate in the U.S. have to pay taxes. The United States generally taxes foreign investors on their income and income that is connected with trade or business. However, there is no tax on capital gains (IRS). The tax rate on real estate is very much driven investment. As a result, changing tax policy is a factor that impact on the non-U.S. investors. Generally, increasing taxes lead to raising the cost of investment and slow down the rate of foreign investors while low tax rates will encourage investors to do business. Over the years, real estate organizations in the U.S. have submitted plans to modify the rules. Unfortunately, the rules that were written in 1980 still continue today. Although tax on a real estate is very high, it has not affected to the investing in real estate in the U.S. Investors are continuing take risks in investing.

When to Invest in Real Estate

As the U.S. commercial real estate recovers, it is critical for investors to know when to focus their time and money. To capture the market, investors began to return to commercial real estate. Well-leased, cash-flow-generating assets in primary markets were particularly in demand.

5 National transaction volume totaled $120 billion in 2010, more than double the $54.6 billion in 2009. Among property sectors, offices and hotels experienced the largest transaction volume (Lynn, D. J.). Different property sectors exhibit different behaviors during expansion and contraction cycles. During contraction periods, the better-performing sectors have been retail, apartment, and to a lesser extent industrial. Office and hotels tend to perform poorly during the down cycle (Plazzi, A., Torous, W. & Valkanov, R.). Conversely, during periods of expansion, office, and hotel tend to be better performing sectors, while apartment and retail generally lag (Lynn, D. J.). A market with a higher beta has higher returns when the index is increasing and lower returns when the index is decreasing.

Factors that Influence Investing in Real Estate in the U.S.

The real estate markets in the U.S. performed better than many countries although they have taken more risks among the economic crisis; higher unemployment, a weak dollar and inflation. From 2008 to 2009, the real estate market in the U.S. paused because of the economic problem. In 2011, the economy seems to be growing. According to the Bureau of Economic Analysis, the gross domestic product (GDP) grew 3.2% to 3.6% from the third quarter to the last quarter. The United States is one of the most interesting countries where investors want to buy investment properties. Among many cities in the United States, New York is the most interesting city where investors want to invest in real estate and it is the first place that investors from emerging countries want to invest in

6 real estate markets also. There are many factors that encourage investors to invest in real estate in the U.S.

Big Amount of Money When compared with other cities in the U.S. during the economic bubble

situation, New York City was one of the last areas that experienced the housing downturn. According to the Miller Samuel report, the peak price in the third quarter of 2009 was $1,270 per square foot in Manhattan. It had dropped a little bit from the first quarter of 2008, when the price was $1,374 per square foot. Real estate prices in the U.S. have taken a smaller hit than others. The Wall Street Journal reported that investment banks gave out the bonuses more than $1,000 billion in 2010 to recover stock markets despite the U.S. suffering with the recession and unemployment rate. With the large amount of money, it can boost the real estate markets. Diversification While financial situation in the U.S. affected many investment industries, the real estate market is diverse. This is because the U.S. has New York Stock Exchange,

7 which is one of the worlds largest stock markets, that provides spreading the risks. Portfolio diversification using several forms of investment such as stocks, bonds and direct investments including real estate can reduce or offset the risks of any one form of asset loosing value (The National Association of Realtors). In order to diversify risk, investors may invest in stocks from different countries or in different asset classes including real estate. International real estate investments are more attractive than other markets because it is not only provides an effective tool for reducing portfolio risk but also it enhances returns. Exchange rate Foreign exchange rates encourage foreign investors to buy properties in the U.S.; for example, the weakening of U.S. dollar drives real estate boomed. This is because when the dollars decline, investors decide to purchase properties with cheap prices because of exchange rate. Moreover, foreign investors might buy real estate with the belief that they can make profits when the dollars increase in value. The exchange rate is used to measure the value of U.S. dollar by comparing to other currencies. Current exchange rate indicates how much of one currency you can exchange for another currency; for example, 1 USD = 0.61 EUR. Quality of Life Finance has been the dominant industry in New York City so it has attracted talented and educated workers to work here. These will be serving emerging market economies and will benefit the local economy in terms of job creation and housing demand.

8 The atmosphere in New York City is conservative compared to other global metropolises. Although the subway system is over a hundred years old, it is still efficient and certainly reduces commuting time for people living in New York City. Moreover, there is a better work-life balance compared with countries like China. These are major considerations for attracting global talent (James, B. R.).

Conclusion
Real estate is a good investment for residential business, which provides earnings upon income as good as it can yield successive income year after year. There are many ways to get into investing real estate business. It is very important to consider before investing in real estate because of the prices and areas. Some areas are not permitted to construct buildings. Investing in real estate is an intelligent approach to primary prices. Higher earnings can be gained from low prices in real estate when time passed. It is easier to lease or sell brand new real estate in convenient locations for better prices and faster earnings.

List of References

Ciochetti, B. A., Fisher, J. D. & Gao, B. A structures model approach to estimating return and volatility for commercial real estate. March, 2003. http://www.reri.org/pdf/RERI%20wp116.pdf

Internal Revenue Service. Taxpayer advocate service. http://www.irs.gov/advocate/index.html

James, B. R. 4 Reasons Why Manhattan Real Estate Is A Strong Investment. November 16, 2009. http://www.brianjamesnyc.com/blog/?p=761

Lynn, D. J. When and Where to Invest in Real Estate. March, 2011 http://www.nuwireinvestor.com/articles/when-and-where-to-invest-in-real-estate57005.aspx

Plazzi, A., Torous, W. & Valkanov, R. Expected returns and expected growth in rents of commercial real estate. January, 2010. http://management.ucsd.edu/faculty/directory/valkanov/docs/real-estate.pdf

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List of References

The National Association of Realtors. Foreign investment in U.S. real estate: Current trends and historical perspective. October, 2003. http://www.realtor.org/Research.nsf/files/foreigninvestmentinus.PDF/$FILE/foreigninves tmentinus.PDF