Invisible ties. The international network of real estate investments and their impact on housing markets – INTREALES

Quantifying international ownership and understanding the structure of the network requires transparency regarding the shareholders of real estate companies. This transparency requires the use of new databases, with France being the preferred case initially in terms of data access. Firstly, this involves using the register of beneficial owners, taking the French case as an example. Since 2017, companies have been required to declare their beneficial owners to the tax authorities. Secondly, data from the French land registry is used to identify all real estate companies with at least one real estate asset in France between 2011 and 2023. Using urban economics methods, the properties are evaluated according to their characteristics in order to calculate the monetary value of the assets owned by foreign residents. Making company shareholders transparent is a key step in the INTREALES project, as it is a prerequisite for any causal analysis of these investments in local real estate markets.

To measure the effects of international investment on local real estate prices, housing vacancies, and tenant characteristics, two distinct methods have been identified. First, we seek to identify distortions in bilateral tax treaties in order to measure changes in real estate taxation for residents of specific countries. Based on the preferred locations of residents of that country prior to these changes in tax treaties, we could identify markets likely to be affected by these investments. Based on this distinction, we will then be able to use traditional causal analysis methods. Second, we plan to identify differences specific to companies based on the country of residence of their shareholders in order to identify behavioral responses to a distortion in real estate taxation. This approach will be favored to measure the effects on decisions made in the tenant selection process.

The register of beneficial owners is incomplete and therefore unable to provide relevant information on international real estate ownership. In fact, it covers less than half of the real estate assets owned by companies in Paris (excluding social landlords). Nearly two-thirds of property ownership, therefore, remains opaque, severely limiting the possibilities for analysis. Nevertheless, based on this data, we have identified a weakness in the system related to the definition of a beneficial owner. The French definition considers any person owning at least 25% of the shares in a company or voting rights to be a beneficial owner. As a result, shareholders owning less than 25% are under no obligation to declare this to the tax authorities. This results in under-reporting of beneficial owners, particularly for companies with significant real estate assets. At this stage, however, it is impossible to determine whether this under-reporting is simply the result of a dilution of company shares for large real estate companies or whether it is due to an optimization of the internal structure of the company's shares in order to avoid declaring shareholders, thereby limiting transparency efforts.

Nevertheless, based on data from the beneficial ownership register, several preliminary observations can be made. International ownership accounts for nearly 15% of the assigned value, comparable to London and Singapore, but below Dubai. This ownership is concentrated at the top of the distribution of companies in terms of wealth. Furthermore, it should be noted that countries with favorable tax treaties regarding real estate income and capital gains are among those with the highest value of Parisian real estate assets. However, at this stage, it is difficult to estimate the real effect of these tax treaties on investment volume.

To compensate for the lack of information concerning the owners of real estate company shares, a new approach has been adopted. By focusing on Sociétés Civiles Immobilières (SCI), a popular investment vehicle in France, it is possible to identify the owners of shares by exploiting the legal statutes of companies. By using information extraction methods to analyze these documents, the project aims to create a register of shareholders in French real estate companies since 2011, thereby increasing transparency in real estate ownership and measuring ownership by international residents. This transparency work would open up two new possibilities. On the one hand, it would provide better coverage of companies for the transparency of international ownership, in order to circumvent the lack of declarations for individuals owning less than 25% of shares. Furthermore, this approach will make it possible to measure the quality of declarations and assess the effectiveness of the French beneficial ownership register. On the other hand, these data will enable us to reconstruct the shareholders of real estate companies since 2011, thus providing information on a period not covered by the beneficial ownership register.

The project aims to produce three distinct scientific outputs. First, an article will seek to quantify and describe international real estate ownership in France. Based on the use of new data, the article will propose a new measure for Paris, while documenting heterogeneity depending on the market in question. While current literature focuses on internationalized cities such as Singapore, Dubai, and London, few studies have looked at different markets, such as tourist or rural markets. France, with its territorial diversity, offers the possibility of measuring the degree of international ownership for different market types. Second, an article co-written with LMU Munich aims to establish the structure of the international shareholder network. By cross-referencing French and British data, the aim is to measure joint ownership for certain entities in different countries. In addition, it will describe the potential specific structure of these companies. Third, an article will study the effects of international investment on local real estate markets, based on the shareholder register created.

Real estate has become an international investment asset. Anecdotal evidence highlights its importance for the wealth management of the Jordanian King, religious orders, Russian oligarchs or the president of the United Arab Emirates. But do these qualitative examples hold up to quantitative scrutiny? Who is really behind investments from tax haven companies in real estate? How is the international network structured and what kind of ownership centralization do tax haven companies hide? What are its impacts on host cities? Do they drive up prices, rents, and lead to higher vacancies as some fear? Do they lead to a construction response that focuses on high-end properties instead of the needs of the local population? The project „Invisible Ties. The international network of real estate investments and their impact on housing markets” answers these questions. A number of researchers who are active in the newly developing literature that analyzes international real estate investments from a single countries perspective team up to illuminate the international real estate market as a whole. The project consists of three packages. First, we quantify international real estate investment from tax havens. This is done from the perspective of the five home countries we have data access to: France, Germany, Britain, Norway, and the U.S. We also provide a global estimate of real estate wealth in tax havens (Package 1, Quantification). Second, we describe the structure of international real estate investment. We create data on the corporate ownership chains behind these investments and describe the resulting international network to explain how it hides (de-)centralization of ownership (Package 2, Structure). Third, we turn to the impact that international real estate investment has in the host economies. We provide causal evidence of its impact on real estate prices and rent levels. We also provide causal evidence of the investments’ impacts on vacancy rates and test for a construction response to this foreign capital, hypothesizing that construction activity is moved to satisfy international demand (Package 3, Impacts). The project will provide policy relevant evidence on the size of the market, its importance across different host economies, as well as its growth over time. We will also show how international real estate investment interacts with the policy goals and housing objectives of the host city. These results will be published in academic papers and disseminated through several venues. We organize a public workshop on international real estate investments as well as seminars in Paris and Munich presenting our research and disseminate results through the channels of the EU Tax Observatory.