Apr062016

What happens to high-end real estate if money laundering stops?

The Panama Papers uncovered the money laundering schemes funneling millions into high-end real state. What happens to this market if the flow of illegal funds suddenly stops?

squattingNew York city is flooded with Russian cash.

Irvine, California, is flooded with Chinese cash.

Miami, Florida, is flooded with crime cash.

What happens to these housing markets—the recipients of much of this money—when the flow of money abruptly stops?

When wealthy oligarchs and the nearly-wealthy who support them in exchange for government largess find themselves faced with tough times, rather than exporting their wealth to foreign safe havens, these wealthy players often find domestic concerns force them to repatriate their money to preserve their status at home. Perhaps this money is needed to shelter them from corruption charges, or worse yet, this money is forced to return home by decree of a foreign judge.

In either case, when money stops flowing in and starts flowing out instead, some new source of money must take its place. If it doesn’t, real estate values are certain to fall.

How secret offshore money helps fuel Miami’s luxury real-estate boom

By Nicholas Nehamas, April 3, 2016 2:00 PMburned_real_estate

  • People linked to wrongdoing abroad are buying condos in South Florida
  • The buyers turned up in a massive leak of secret files from offshore companies
  • Flood of foreign cash helps crowd locals out of hot housing market

At the end of 2011, a company called Isaias 21 Property paid nearly $3 million — in cash — for an oceanfront Bal Harbour condo.

But it wasn’t clear who really owned the three-bedroom unit at the newly built St. Regis, an ultra-luxury high-rise that pampers residents with 24-hour room service and a private butler.

Shell companies don’t conduct business of their own. They are legal and often used to buy pricey real estate because their owners can stay hidden.
In public records, Isaias 21 listed its headquarters as a Miami Beach law office and its manager as Mateus 5 International Holding, an offshore company registered in the British Virgins Islands, where company owners don’t have to reveal their names.

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This is also how US tax dodgers conceal their income from the IRS. I imagine the IRS is keen to examine these papers to recover lost tax money as well.

There the trail ran cold.

Until now.

That’s because the Miami Herald, in association with the International Consortium of Investigative Journalists, has obtained a massive trove of confidential files from inside a secretive Panamanian law firm called Mossack Fonseca. The leak has been dubbed the “Panama Papers.”

Mossack Fonseca specializes in creating offshore shell companies for the world’s richest and most powerful people.

The firm’s leaked records offer a glimpse into the tightly guarded world of high-end South Florida real estate and the global economic forces reshaping Miami’s skyline.

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Is Irvine much different than Miami?

And MF’s activities bolster an argument analysts and law-enforcement officials have long made: Money from people linked to wrongdoing abroad is helping to power the gleaming condo towers rising on South Florida’s waterfront and pushing home prices far beyond what most locals can afford.

What is a disaster for existing owners, particularly the affected oligarchs, is a boon for everyone else. This ill-gotten foreign money drives up real estate prices to levels locals can’t afford. If this money leaves, prices necessarily must fall to levels supportable by local residents. Who else will buy these properties if not locals?

cautiously_optimistic

Domestic real estate markets can’t be sustained in perpetuity by the influx of foreign investment. The Russian experience in New York is a microcosm of what will happen here in California when the inflow of Chinese money turns to an outflow and what will happen in Miami when the flow of crime money reverses. This probably doesn’t filter down to the level of ordinary workers, so I don’t see this as a precursor to a widespread price decline, but it could easily have a sudden and dramatic impact on ultra high-end real estate in markets where this money used to flow.

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