The Hedged Cap Rate

Start with the number that matters

Most articles about foreign investment in U.S. real estate open with a cap rate comparison. Yields here versus yields there. It's a clean story, and it's usually wrong.

Here is the version that survives contact with an investment committee, drawn from MSCI's Cross-Border Capital in U.S. Commercial Real Estate (PREA Quarterly, Summer 2026):

A U.S. office asset yielding 7.2% delivers roughly 2.0% to a Japanese investor once currency hedging costs are applied — against 3.8% available in Japan domestically.

The U.S. asset yields nearly twice as much on paper and roughly half as much in practice. Japanese hedging costs peaked above 500 bps in 2023. Swiss investors currently face a 310 bps cap rate spread in favor of U.S. property against a 4.3% interest rate differential working the other way.

This is the single most useful frame for anyone underwriting U.S. real estate from abroad: the yield premium is real, and it is frequently consumed entirely by the cost of getting your money home. MSCI identifies three signals that actually drive cross-border flows — the cap rate spread, the interest rate differential that sets hedging cost, and home-country employment growth. Not one of them is "the U.S. looks cheap."

Which is why the investors doing best in this market are the ones who either hold unhedged with a long horizon, or who buy yield high enough to survive the hedge.

Who's coming, who's leaving

Cross-border investment into U.S. commercial real estate reached $14.4 billion in the first half of 2026, up 35% year over year, with retail, hotel and office leading (CBRE). Q1 alone was $5.8B, +18%, representing about 5% of total U.S. volume.

Those are recovery numbers off a weak base — and they sit against a longer structural decline. Foreign buyers accounted for roughly 6% of U.S. deal volume in 2025, versus a 9% five-year average and 11% ten-year average (Real Capital Analytics, via Morgan Stanley). Cushman & Wakefield adds a detail worth sitting with: only about 26% of U.S. cross-border activity was new acquisition — the rest was refinancing and recapitalization. A lot of foreign capital is defending positions, not adding them.

Canada is the story inside the story. Canadian institutions have averaged more than $10 billion a year into U.S. property — more than three times the next-largest source country (MSCI). That flow is down 32% over the trailing twelve months to March 2026, from a five-year average of $10.7B to a run rate near $7.3B (Colliers, via CoStar). Canadian capital is redirecting to the U.K., EU, Australia and Southeast Asia. The U.K. has overtaken the United States as the top global destination for cross-border real estate investment.

MSCI's 2026 directional scorecard sorts the rest:

Increasing: Japan · South Korea · Singapore · Australia · Hong Kong · Norway · Sweden · Spain

Decreasing: United Kingdom · Canada · France · Germany · Switzerland · Netherlands · Ireland · Italy

Japan is the clearest inbound surge. Japanese buyers have deployed $2.1 billion-plus across New York property types since January 2024, including $233 million across 326 multifamily units — often in the $5–15 million building range (The Real Deal, April 2026). The logic is arithmetic: U.S. multifamily cap rates near 5% against Japanese government bond yields of 2.4%, cheap yen-denominated borrowing, and favorable Japanese depreciation treatment on wood-frame assets.

What they buy, and where

Cross-border capital in H1 2026 concentrated in retail, hotel and office — a genuine rotation, given how thoroughly retail was out of favor five years ago.

Knight Frank's Active Capital Survey 2026 surveyed 119 global investors holding over $1.4 trillion and planning $144 billion of deployment. Their sector intentions: offices 69%, living sectors 65%, industrial/logistics 63%, retail 56%, data centres 31%, healthcare 31%. Within living, single-family rental jumped to 31% from 22% — the biggest single mover. Sixty-eight percent are open to joint ventures. (Important caveat: that $144B is global, and the U.K. and Germany rank ahead of the U.S. as destinations. It is not U.S.-bound capital.)

On geography, the tidy "Sun Belt versus gateway" framing has expired. 2026 data shows both:

• New York drew 14.1% of its CRE deal volume from international buyers in 2025; Miami 9.0% (Avison Young).

• Top U.S. markets by total investment volume in 2025: Dallas–Fort Worth $22.3B, San Francisco Bay Area $20.5B, Los Angeles $18.9B, New York $18.8B, Phoenix $14.0B.

• PwC/ULI's Emerging Trends in Real Estate 2026 ranks Dallas/Fort Worth #1, Jersey City #2, Miami #3, Brooklyn #4, Houston #5.

• Within Florida, the divergence is sharp: Miami is top-three while Jacksonville, Southwest Florida and Deltona/Daytona all declined materially.

Texas and Miami lead on fundamentals. The New York metro is re-rating hard. Secondary Florida is weakening. Anyone still selling "Sun Belt versus gateway" is selling a 2022 map.

The Latin American channel

No foreign capital cohort is more concentrated in a single American market.

MIAMI REALTORS® surveyed 66 South Florida condominium projects across a 22-month window covering buyers from 73 countries. The findings:

• 52% of new-construction sales went to global buyers (up from 49%), against 48% domestic

• Roughly 86% of all foreign sales were to Latin American buyers

Ranked by purchase volume: Colombia 23% · Mexico 20% · Argentina 11% · Brazil 9%, then Turkey, Peru and Spain at 4% each.

By submarket, the Latin American share of international buyers is close to total: West Palm Beach 96%, Coral Gables 82%, Brickell 77%, Miami Beach 75%. In those neighborhoods, "foreign buyer" and "Latin American buyer" are effectively the same category.

The motivation is not yield-chasing. A survey of Latin American investors (Dividenz, March 2026 — a vendor survey, so read it as directional) found 35% planning to increase foreign-asset allocation over twelve months against only 4% reducing, with 28% explicitly prioritizing tangible assets with clear legal traceability. Country-specific anxieties tracked exactly as you'd expect: inflation and regulatory change in Mexico, legal certainty in Colombia, currency volatility in Argentina.

The survey's own framing is the honest one: the priority is less about chasing extraordinary returns and more about preserving value. That is a different product than a return-maximizing allocation, and it should be underwritten as one.

The residential counterpoint

Commercial cross-border is recovering. Residential is not, and the gap is instructive.

The National Association of REALTORS® 2026 International Transactions report (April 2025–March 2026) found foreign buyers purchased $45.3 billion of U.S. homes, down 19.1%, across 67,100 units, down 14% — the second-lowest total since tracking began in 2009. That's 1.7% of existing-home sales and 2.0% of dollar volume.

The detail:

MEasure	dATA
Median price paid	$465,000 (all-buyer median: $413,600)
All-cash share	48% (all buyers: 28%)
Top origin by units	Canada 16% · Mexico 14% · China 11% · India 9%
Top origin by dollars	China $7.6B (~$1M average purchase)
Top destinations	Florida 20% · California 19% · Texas 12%

New York fell out of the top five destinations entirely.

NAR's own read on the decline is the part worth quoting: "Despite favorable exchange rates, we still saw pullback." A weaker dollar did not offset policy uncertainty. That is a genuine corrective to the standard "weak dollar equals foreign buying" pitch — and a caution against building a thesis on currency alone.

The plumbing has changed. Read this part twice.

Three developments that materially affect how foreign capital should structure U.S. real estate right now.

One — FIRPTA basics haven't moved. Withholding is 15% of the amount realized on disposition of a U.S. real property interest, with a $300,000 residence exemption and a reduced tier between $300k and $1M. A REIT qualifies as domestically controlled if non-U.S. persons hold under 50% of share value over a five-year lookback. Qualified foreign pension funds are exempt from FIRPTA entirely under §897(l).

Two — the blocker corporation is being reopened. Final regulations effective April 2024 required looking through domestic C corporations to their foreign owners, which broke a lot of domestically-controlled-REIT structures. Proposed regulations REG-109742-25, published October 21, 2025, would eliminate that look-through, treating domestic C corps as non-look-through persons again — and would allow a retroactive election back to April 25, 2024. This remains proposed, not final: the comment period closed December 22, 2025, and Treasury has not issued a final rule as of this writing. It is also the most consequential structuring development for foreign real estate capital in two years. Talk to your tax counsel about it before you talk to anyone else.

Three — state ownership restrictions are real and carry teeth. Texas SB 17, effective September 1, 2025, restricts acquisition of interests in commercial, industrial, residential and agricultural property by persons and entities tied to designated countries — with civil penalties of the greater of $250,000 or 50% of market value, and potential felony exposure for knowing violations. It reaches indirect interests, which makes it a diligence obligation for any fund with LPs from covered jurisdictions, not just for direct buyers. Florida's SB 264 imposes parallel restrictions. Constitutional challenges in the Fifth and Eleventh Circuits have so far turned on standing rather than merits — meaning the underlying questions remain open.

What we take from it

Underwrite the hedged return, not the headline yield. If the hedge eats the premium, the deal was never there. Investors who buy income at a wide enough spread survive the hedge; investors who buy appreciation stories do not.

Foreign capital is concentrating, not just shrinking. Its share of U.S. volume has roughly halved, but where it is going — Miami, Dallas, New York, and increasingly retail and hotel — it is going with conviction and, in the LatAm case, in cash.

The reason most foreign capital comes here has never been the yield. It is enforceable title, transparent transfer, a functioning court system, and a currency that doesn't wipe out a decade of savings in a bad quarter. Twenty-eight percent of Latin American investors said so directly. Price that correctly and you'll underwrite this capital better than the people quoting cap rate spreads at it.

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OTIMA is a U.S. real estate investment firm with investors across four continents. We buy income-producing property — necessity retail, medical, and multifamily — and put our own capital in every deal. Cross-border structuring and reporting is routine here, not an exception. If you'd like to talk through how U.S. real estate fits a non-U.S. mandate, a principal will take the call.

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Figures as of the dates cited. Nothing here is tax, legal or investment advice — cross-border structures are fact-specific and require qualified counsel in both jurisdictions. This material is for informational purposes only and is not an offer to sell or a solicitation of an offer to buy any security. All investments involve risk, including possible loss of principal.