Foreign investment in residential real estate: Recognize as FDI or not?

A ubiquitous form of foreign direct investment^Footnote1 is investment in residential real estate. However, neither trade and investment treaties nor reports on investment reflect this reality. Presumably, investment in housing purchases and construction form part of larger industry categories, e.g. “unspecified” or “business activities,”^Footnote2 or is obscured due to the elusive nationality of investors,^Footnote3 consequently escaping classification as greenfield, M&A, or portfolio investment. Yet, reports in the public media and experiences in local communities, hosts of such FDI, reflect a different reality.

Interestingly, the two most recent and consecutive semi-annual reports of the Bank of Canada list household indebtedness and house prices as the two most important key risks to the stability of the Canadian financial system.^Footnote4 One report identifies “stress emanating from China and other EMEs” as the third most important risk factor, whereas due to the latest governments’ (federal and provincial) intervention in the mortgage and foreign-investor-driven housing market, the second report relegates “fragile fixed income market liquidity”^Footnote6 to third place. However, no authoritative statistics are available to gauge the importance of residential real estate as a portion of total Canadian inward FDI.

I wish to emphasise three points. First, that foreign investment in residential real estate is a major factor impacting domestic conditions of developed economies, and although representing one of the most common and old forms of FDI,^Footnote7 has eluded recognition as such for too long. Second, FDI in housing raises unique challenges to the prevalent international investment regime. On the one hand, it is a distinctive form of FDI because it involves the most private interest of any member of any community, namely the home. On the other hand, similar to other high profile investments, it may propel adverse socio-economic,^Footnote8 cultural, and political impacts of the sort attributed to FDI in mining, large infrastructure construction, etc., or leading to the Namur Declaration.^Footnote9 And thirdly, due to its prominence as a capital asset in Western capitalist economies and societies, FDI in residential real estate elicits issues akin to national security concerns.^Footnote10 Indeed, the Investment Canada Act, to which Canada’s investment agreements are subjected (including the Canada-China Investment Promotion Agreement)^Footnote11 describes national security as comprising “[the] potential impact of the investment on the security of Canada's critical infrastructure. Critical infrastructure refers to processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government.”^Footnote12 This is further articulated in Canada’s National Strategy for Critical Infrastructure, meaning that “[c]ritical infrastructure can be stand-alone or interconnected and interdependent within and across provinces, territories and national borders. Disruptions of critical infrastructure could result in catastrophic loss of life, adverse economic effects, and significant harm to public confidence.”^Footnote13

Vancouver’s current residential real estate market, similar to that of select metropolitan hubs in other developed economies, exemplifies this paper’s arguments.

In the 21^st century, FDI targeting Metro Vancouver has increased unprecedentedly, exponentially, and almost overnight. The demolition of 5,297 dwellings in Vancouver between 2010 and mid-2015 amounted to an average of about three residential demolitions per day;^Footnote14 and its attribution to luxury residences belies the spillover effect it unleashed, which has been engulfing the entire urban region.

For a long time, data on the size and number of the residential real estate transactions in Metro Vancouver, and the identity of the purchasers, have been publicly inaccessible, although rumours abounded regarding the foreign driving source of investment, associated practises, and its economic scale.^Footnote15 This fog had dramatically dispersed in 2016, as the three levels of government (federal, provincial, and municipal) could no longer afford to turn a blind eye to the unfolding housing crisis and persistent media reports.^Footnote16 In an impulsive about-face, governments introduced regulations inconsistent with decade-long policies that welcomed FDI in residential real estate as a boon the domestic home construction industry and government coffers. Notably, the provincial government introduced an additional 15 per cent property transfer tax applicable only to foreign buyers’ (natural and corporate) purchases in the Greater Vancouver Regional District.^Footnote17 This triggered a class action pending before the Supreme Court of British Columbia, maintaining, among other things, breach of the non-discrimination principle by which Canada is bound in some 30 treaties.

The fact that similar experiences have been registered in other metropoles – New York and San Francisco, London, Sydney and Melbourne,^Footnote18 as well as in Hong Kong – and that some of these jurisdictions have awoken to the challenge, justifies express recognition of foreign investment in housing as FDI meriting a distinctive approach. It also raises several questions, for instance, whether limits on the definition of investment (and concurrently, expropriation) are justified for the purpose of protecting local populations economically and against dislocation; or, do foreign tribunals represent appropriate judicial instances to hear relevant claims? Essentially, it is time to engage in a careful and thorough examination of existing investment treaties and their application to FDI in housing, and employ diligence in negotiations of future investment treaties. Here, the treatment of environmental concerns (public commons) in investment treaties and dispute settlement provides guidance. The concept of sustainable development can be expanded to require parties to protect the general lifestyle and survival of vibrant residential neighbourhoods/communities; commit to maintaining market conditions allowing for reasonable housing affordability that is independent of the public purse (e.g. social housing and anti-poverty programs); and legislate and implement anti-corruption monitoring and law enforcement to counter the circumvention and abuse of municipal residential real estate regulations and development policies.   

Dr. Noemi Gal-Or is retired Professor of Politics and International Law, Kwantlen Polytechnic University, and Vancouver lawyer, Noemi Gal-Or (ngalor@gal-or.com).