US tax change should boost property derivatives

A recent change to tax law could give the US property derivatives market a much-needed boost. The change to the Foreign Investment Real Property Tax Act (Firpta), legislation enacted in the 1980s to discourage foreign ownership of US property, drops the 10% levy on investments made through derivatives. Firpta, in part, was blamed for the lack of a two-way US property derivatives market, since foreign players avoided it thanks to the prohibitive levy.

The Internal Revenue Service has ruled that swaps made on a broad-based index covering a geographic area populated by more than 1 million people are exempt from Firpta. This change could be just what the US market needs to take off, as activity has been one-way.

"The change could open the market to two-way flows by attracting foreign accounts," says Jeremy Milim, associate in real estate derivatives at CBRE GFI Group in New York. "This market has been struggling to find a buy side."

Pricing on the benchmark National Council of Real Estate Investment Fiduciaries (NCREIF) index has turned negative, which Milim believes could entice investors seeking to take a view on that forecast. In addition, Firpta has already given a lift to trading on the Radar Logic index, the US residential property index. "We’ve been doing lots of trades on the Radar Logic index, and the Firpta ruling has been a real positive," says Milim.

The picture is getting better

Returns since December 2007

Source: IPD