Photo:
Getty
As the CEO of a large U.S. real estate enterprise that raises capital from foreign investors, I’m in a unique position to see how America’s political system and economy are viewed from abroad. In my office, we joke that we don’t need to read the news to know where there is trouble around the world; all we need to know is the predominant nationality of the people asking to meet with us in any given week.
When Mexico elected a left-leaning president, we started to receive calls from wealthy Mexicans wanting to take money out of the country. When riots and civil unrest gripped Chile, normally one of the most stable countries in Latin America, we started to get visits and phone calls from Chileans. It doesn’t take much instability for people to want to move their money elsewhere to protect its value — and for a long time, the favored destination has been the United States.
Recently, however, there has been a noticeable downturn in the flow of foreign capital to the U.S. — a fact that has been attributed to a variety of factors including the ongoing trade war with China and a changing regulatory environment in the U.S. According to the Wall Street Journal, “foreign investors were net sellers of U.S. commercial real estate last year for the first time since 2012,” and according to a February report by Real Capital Analytics, “cross-border acquisitions of U.S. commercial real estate retreated below $50 billion in 2019, to the lowest level in five years.”
Given that we’re in a presidential election year, I believe now is a good time to revisit the reasons that the U.S. has historically been an attractive destination for global capital — reasons we often take for granted. They include:
A transparent, stable legal system: In spite of its occasional failures, our legal system compares well to those of other countries. The checks and balances and transparency in our system provide foreigners with a sense that there is less corruption and more fairness in litigating business dealings than in many other nations. In many places around the world, laws can change on a whim of a leader or a political party, which is potentially disastrous for foreign direct investment. Investors need to be able to trust that the legal system will uphold the existing laws and treat everyone equally.
Liquidity and size of the economy: This is another asset of the United States. Using our industry as an example, a hotel owner in Latin America who wishes to sell will probably have to wait a long time to find a buyer and close a deal. By contrast, in the U.S., it is possible to sell a hotel or other piece of real estate within months thanks to all the specialized brokers, financial consultants and legal experts who are readily available to help handle the transaction. That level of liquidity allows people to feel more comfortable investing in real estate here compared to other countries.
A diverse, liquid banking system: There are many banks and financing sources that compete for financing. Quotes and terms are provided very quickly. The terms, in general, are also reasonable, with sufficiently long amortization schedules and low interest rates. This is not the case in most other countries. To use a recent example, in Costa Rica, we could only obtain 12- to 15-year amortization versus 30 years, and the interest rate was about 350 basis points higher than U.S. rates.
Transparency and availability of information: This is another thing we take for granted in the U.S. When our firm undertakes due diligence on a property, we process and consider reams of information on the market, the competitive set, the demand drivers, etc., to fully investigate the pros and cons of a deal and make an informed decision. In other markets around the world, it is much more difficult to uncover reliable information; the investigation itself becomes a time-consuming matter that can be very costly.
The dynamic employment environment: This is another strength of the U.S. economy from an investor perspective, albeit somewhat controversial. Most U.S. companies can downsize their payroll quickly to allow them to be more competitive when there’s an economic downturn. In many countries, businesses may have their hands tied when it comes to terminating employees and the termination-benefit pay may make staff dismissals a challenge. Meanwhile, the U.S. has a very favorable environment for the formation of companies that require a large workforce. However, we need to reform the immigration laws to allow more qualified people to legally join that workforce and contribute to our economy.
In short, our economic institutions, while by no means perfect, are among the most dependable and stable in the world, and it is in our best interest to keep them that way, both for our own benefit and to reassure foreign investors who get squeamish at the first sign of instability or risk.
So to all the political candidates, I’d like to offer these words of advice: Let’s tweak the things that are broken or can be improved upon — like the healthcare system, environmental laws and immigration policies — without making drastic, systemic changes that could spook foreign investment and stop our economy in its tracks. While we are certainly not perfect and there are many areas in which we can improve, our economic system is still the envy of the world. Let’s keep it that way.