Trump’s election was the surprise that shocked the world in the early morning of November 9th. The stock market plummeted leading up to his victory, with a swift recovery the next day. As the nation and the world begins to accept this new reality, many wonder what the future of real estate private equity might look like with Trump as president.
Today, we are solely focused on specific policy changes that have the potential to change the industry.
In the short term, the uncertainty about Trump’s plans could limit global capital flows into the United States. Just last night, France and the UK refused to attend a talk with other bloc countries, where they discussed how to handle the new president-elect. Countries may find it difficult to accept Trump and think twice about sending their investment funds into the United States. More than one European country has already stated that they will reduce or eliminate capital allocations to investments in the US. However, this is likely short term. Once Trump provides more information and clarity on how he plans to treat foreign investment, capital flows are likely to continue.
In addition, Trump is expected to relax the Dodd Frank act, which places the responsibility for regulation of the financial industry in the hands of the US government. Trump’s real estate development background will likely leave financial regulation to free markets. Without Dodd Frank, lender reserve requirements will likely fall, and this could free up more capital for lending.
Next, With a President who fully understands and utilizes 1031 tax benefits and our new Republican congress, it is likely that Trump will reverse Obama’s attemps at reducing tax benefits avialable to real estate investors. The 1031 exchange program will likely continue to run throughout his presidency.
The most imperative way Trump could affect the real estate private equity industry is by changing the carried interest laws. Of the utmost importance to the industry is how carried interest is treated from a tax perspective. Carried interest is the income that funds receive when they put other people’s capital to work in real estate assets and operating companies. Early in Trump’s campaign, he stated that his tax plan “ends the current tax treatment of carried interest for speculative partnerships that do not grow businesses or create jobs and are not risking their own capital, and reduces or eliminates other loopholes for the very rich and special interests.” The current legislation allows for carried interest to be taxed at the capital gains rate, rather than the much higher income tax levels. Trump’s actual policies likely will not be reflective of what he campaigned to win the middle class – given his extensive use of money from the capital markets, the carried interest laws are likely to stay exactly as they are.
Real estate private equity funds are affected by credit markets, supply/demand, property attributes, and overall economic conditions. The political uncertainty surrounding Trump’s presidency is not expected to create a sudden impact on long-term investments such as private equity funds, given all of the factors that come into play. We can only hope that his policies will continue to ensure the smooth allocation of capital in the US for years to come.