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Commercial Real Estate Lens: Need to Know

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·        Macy’s taps senior eBay exec as president in e-commerce push

·        Firm predicts fall in Facebook usage among teens

·        Hedge fund manager Dalio cuts risk amid worries about Washington

·        What the science actually says about gender gaps in the workplace

·        The secrets of the happiest companies and employees

·        At what age do workers start hating their jobs?

·        The Indian owners of the Plaza Hotel in NYC have hired JLL to sell their stake.


·       TD, HSBC said to be in talks for space in new Toronto tower at 16 York


·          China's Dalian Wanda drops purchase of Nine Elms Square in London

·          Cross-border flows are on the decline

·          Forcing companies to pay a premium above minmum wage for hours not guaranteed in advance


·        Why the Chinese yuan’s hot streak will cool off



US Home Prices Rise at Slowest Pace in June Since 2013 (Financial Times) 

         The Bottom Line: Yes, the month-over-monthchange in single-family home prices was meager according to the FHFA, but the Q2 figures still show appreciation of 6.6% on a year-over-year basis (chart below)--in line with median price changes in existing homes and condos.  Home prices rose in 48 states and the District of Columbia on an annual basis, with the largest price change in in the Seattle metro area, where prices increased by 15.7 percent.  The smallest change?  In the New Haven metro, where prices rose by just 0.1 percent. 

Note: the FHFA’s data set includes the ability to parse the numbers on a more granular basis than the NAHB or NAR data sets: there’s the "Distress-Free" house price index (where sales of bank-owned properties and short sales are removed from the purchase-only dataset), the "Expanded-Data" house price index (where data from FHA-backed mortgages are added to the purchase-only data sample), and the "All-Transactions" house price index (where appraisal values from refinance mortgages are added to the purchase-only data sample).

US home prices grew at their slowest pace in more than 3 years in June and missed Wall Street expectations, data on Tuesday showed. A measure of single-family home prices rose 0.1 per cent in June compared with May, when it grew 0.4 per cent, the Federal Housing Finance Agency said. That marked the slowest pace of growth since November 2013 when prices remained flat and missed economists’ expectations for a 0.5 per cent increase. The quarterly figures showed home prices were up 1.6 per cent in the second quarter from the first and were up 6.6 per cent from a year ago.The US housing market has been supported by a strong jobs market but a tight supply of homes in the face of healthy demand has pushed prices higher. Home prices are a lagging indicator of the housing market as they are published with a two-month delay. The FHFA’s house price index includes readings for the nine Census Bureau divisions and is a weighted, repeat-sales index, in that it measures average price changes in repeat sales or refinancings on the same properties.

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Bankers Rush Into an Unlikely Offshore Tax Haven (Bloomberg Businessweek)

         The Bottom Line: Office leasing in Puerto Rico may be ripe for a pick-up in volume, due to an increase in the number of offshore banks registering as International Financial Entities (IFEs).  Needing paid-in capital of just $250,000 and an office in Puerto Rico with at least four employees, IFEs are not subject to the Common Reporting Standard, since the US hasn’t signed on to it.  While IFEs are subject to U.S. federal regulations and fall under IRS jurisdiction, perceived benefits include the ability to avoid taxes at home and shield one’s identity.  

Some 65,000 Puerto Ricans left their bankrupt U.S. island commonwealth last year. A group of private bankers are moving the other way. They’re increasingly opening offshore banks known as International Financial Entities, which were created by a Puerto Rican law in 2012. There are 44 IFEs now, with 18 opening in the past year, according to data compiled by the U.S. territory’s financial regulator. “Just in the last six months, we’ve probably closed seven deals for international banks,” says Ryan Christiansen, president of Christiansen Commercial Real Estate, a brokerage based in Puerto Rico that leases office space.

Tax experts attribute at least part of the influx to a little-known loophole made possible by the IFE structure. It lets non-U.S. account holders put money in Puerto Rico anonymously and potentially avoid taxes at home even as they benefit from the stability and safety of the U.S. That’s become increasingly attractive because of a new global financial- disclosure system taking effect in September. Under the Common Reporting Standard, more than 100 countries have agreed to automatically provide to one another annual reports about accounts belonging to people subject to taxes in each member nation. Previously, they mainly shared information on request, making it harder to identify suspect accounts. Much like the U.S.’s Foreign Account Tax Compliance Act, which requires foreign banks to report on Americans with accounts, the CRS initiative is meant to combat the use of offshore bank accounts to evade taxes.

The loophole arises from quirks in various international disclosure agreements. First, the IFEs aren’t subject to the CRS reporting process because the U.S. hasn’t signed on to it, opting to stick with its 113 separate bilateral agreements. But the IFEs don’t have to comply with these because Puerto Rico, like all U.S. territories, is excluded from those deals. Puerto Rico provides substantial confidentiality protection for foreign individual investors, according to Tim Richards, whose law firm, Richards & Sanchez, specializes in international tax law.

IFEs aren’t immune to official scrutiny, of course. As U.S. institutions, they must report suspicious financial activities and help U.S. government agencies stamp out money laundering, says a spokesman for the IRS. They’re also required to cooperate with IRS inquiries, but IFEs don’t collect information about non-U.S. individuals with accounts if their assets are held through offshore companies or trusts. As long as these don’t have U.S. shareholders or U.S. income, the identity of the ultimate owner doesn’t have to be routinely reported to the IRS. For foreigners who hold such accounts, “there is no reason that a Puerto Rican IFE should be in possession of such data,” Richards said in an email. To take advantage of the loophole, a non-U.S. client sets up a shell company or a trust to hold assets. That entity then deposits funds with a Puerto Rican IFE. “Once set up, it’s a huge way for people to avoid CRS reporting,” says Alan Lips, a partner at Miami-based accounting firm Gerson Preston.

Mark Henny, chairman of Fairwinds International Bank LLC, an IFE that opened last year, traded an office on the eastern shore of Lake Zurich for a suite in an office park in San Juan, the island’s capital. Business is booming, Henny said in an interview with the investment news website Citywire in January. His bank’s clients are mainly Europeans, and he expects to “expand towards Latin America and perhaps Asia,” he said. Henny declined to comment, according to the firm’s chief executive officer, Sebastian Couturier, who also declined, citing travel schedules. Henny told Citywire that Fairwinds’s speed of service and the stability and protection of the U.S. legal system were among the reasons clients were attracted to the firm.

Another attraction may be how Puerto Rico treats investments by foreign citizens: That money isn’t subject to tax there. (The IFEs that hold those investments are taxed at just 4 percent of profits.) The 2012 IFE Act was introduced to draw U.S. and foreign investment to the island, where half the population lives in poverty. Assets held by IFEs totaled $848 million at the end of March, up $150 million since the end of 2016, and more than double the amount at the end of 2015. IFEs have attracted insurers, brokers, and banks, among other legitimate operators, according to George Joyner, the commissioner of Puerto Rico’s financial regulator. He stresses that IFEs are subject to U.S. federal regulations and fall under IRS jurisdiction. “Puerto Rico is not and does not intend to become a fiscal tax haven,” Joyner wrote in an email.

Other parts of the U.S. have attracted foreign cash as traditional destinations such as the Bahamas, Grand Cayman, and Switzerland respond to global pressure to crack down on secrecy. Some banks are wooing foreigners to put money in Nevada, South Dakota, and Wyoming with promises of confidentiality as long as they aren’t aiming to evade taxes abroad. Some desire for privacy isn’t unreasonable, regulators and wealth advisers say. Confidential accounts may protect against kidnappings or extortion in countries where law and order is tenuous. The biggest hurdle to setting up an IFE is establishing correspondent relationships with other banks, which IFEs need in order to send or receive money from around the world. Many global banks are wary about working with financial institutions in a region perceived as carrying regulatory and money laundering risks. Otherwise the requirements aren’t arduous: paid-in capital of $250,000 and an office in Puerto Rico with at least four employees.  “IFEs can be a great asset to Puerto Rico, or they can be poison if not properly regulated,” says Nick Prouty, whose firm, Putnam Bridge, is investing in the territory. He says accounts in the offshore banks ought to be closely watched “to ensure Puerto Rico does not become the next Panama Papers story.” 



Think Rates Are Going Up? Banks Don’t (WSJ)

         The Bottom Line: Ahead of this week’s confab of central bankers at the Jackson Hole summit, US banks seem largely complacent with respect to their interest rate positioning. Across all banks, the percentage of total assets that are at a fixed rate for more than five years was 27.5% in the second quarter of 2017—the highest level since the FDIC started tracking this metric in 1984.  The bank data also show an increase in lending to CRE, particularly at smaller institutions.  Commercial real-estate loans made up 31.5% of assets at midsize banks in the quarter, up from 25.7% in the second quarter of 2012—a far cry from the composition of loans made by larger banks.  

After years of waiting for interest rates to rise, some banks have started to lend as if they never will, loading up on a record amount of loans and securities that carry low rates for years. The percentage of bank assets that won’t mature or change rates for more than five years reached a new high in the second quarter, according to Federal Deposit Insurance Corp data released Tuesday. That means banks are allowing more borrowers to lock in low rates for long periods of time, a potential risk should rates move sharply higher.

“The interest-rate environment and competitive lending conditions continue to pose challenges for many institutions. Some banks have responded to this environment by ’reaching for yield’ through higher-risk and longer-term assets,” FDIC chairman Martin Gruenberg said in remarks accompanying the release of the quarterly data. An added worry: Much of this lending for longer is in the booming area of commercial real estate, where borrowers finance offices and apartment buildings typically with loans that have fixed-rate periods from three to 10 years. The rise in bank assets with longer maturities is a side effect of nearly a decade of historically low interest rates. Those have pinched bank profits and led more firms to lend for longer to try to capture more yield. So far, that hasn’t proven a problem as long-term rates have remained low, despite the Federal Reserve increasing short-term rates, and credit quality has stayed strong. 

Regulators have warned, though, that the growing share of longer-term and commercial-real estate loans at some banks could be risky. By locking in longer terms for loans at lower rates, banks could face a profits squeeze if they have to raise deposit rates sharply in the future. And a heavy concentration in commercial real-estate loans could become an issue if credit issues begin to crop up. Across all banks, the percentage of total assets that are at a fixed rate for more than five years was 27.5% in the second quarter of 2017, its highest since the FDIC started tracking it in 1984. The metric reached 33.7% in the second quarter at smaller banks with $1 billion to $10 billion in assets.  Commercial real-estate loans made up 31.5% of assets at those midsize banks in the quarter, up from 25.7% in the second quarter of 2012. The figure is far lower at bigger banks, at 6.4%, and has remained steady in recent years.

Banks largely make money in two ways: from lending and fees. Smaller lenders tend to rely more on lending profits than bigger banks that have fee businesses like wealth management. Lending profits typically come from the difference between what banks pay out on deposits and what they earn on loans and securities. But rock-bottom interest rates following the financial crisis eroded these margins across the industry, leading some banks to make longer-term loans to try to get similar yields. Growing their volume of loans also helped them compensate.  The firms that were often hungriest for bank debt in recent years were commercial-real estate borrowers. Between 2015 and early 2017, commercial-real-estate loans generally grew at a pace above a 10% annual rate at smaller lenders, according to Federal Reserve data. That rate, now around 9%, has helped banks compensate for a slowdown in general business lending. Much of that lending is floating rate, meaning banks face less risk from rising rates. As banks chased commercial-real-estate borrowers, competition led to more favorable lending terms. “Every meeting I went to, bankers said, ‘We’re not going to go past five years” on commercial real-estate, said Scott Hildenbrand, chief balance sheet strategist at Sandler O’Neill & Partners. Within a year or so, the bankers were saying, ‘We’re not going to go past 10 years.”


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