When British citizens took an unprecedented vote to leave the European Union on June 23rd of this year, investors everywhere knew that markets were in for a bumpy ride. Colloquially known as the “Brexit”, the decision has reverberated through the investment community (not least because London is a major financial hub). The day after the decision, $2 trillion evaporated from the world economy, the biggest intra-day drop in recorded history, eclipsing even the worst day of the 2007-2008 financial crisis. While the larger part of the immediate loss was to equity and debt markets, London real estate has also not been left unscathed, and the Brexit has also impacted real estate markets here at home.
The U.S. real estate market was already viewed favorably in the international arena, owing to its steady climb since 2012. Recent fluctuations in the Chinese markets have caused even more cash to leave China, bound for American real estate. (Chinese real estate conglomerate Greenland Group is currently working on acquiring a massive, $1 billion mixed-use project in downtown Los Angeles called “Metropolis.”)
One recent game changer for U.S. real estate markets has been the reform by President Obama passed last year regarding the Foreign Investment in Real Property Tax Act, which is creating an opportunity for more foreign investment in REITs, increasing investment ceiling limits for foreign investors from 5% to 10% ownership of a publicly traded REIT without incurring extra taxes in the U.S.
The Brexit has only strengthened the favorable view of U.S. real estate, as it uncovered more potential instability in the European markets. For decades, London was the hottest commercial real estate market in the world, but it has recently been overtaken by New York, which usually serves as a reliable bellwether for the U.S. real estate market in general. Other major urban centers that are seeing a post-Brexit boost are Los Angeles and San Francisco.
One interesting thing to consider is that the actual details of the Brexit decision are vague and noncommittal. As of this writing, there has not been a set date for a departure, nor has it been outlined exactly what economic changes Britain’s departure of the Euro zone will entail. It’s this lack of knowledge that investors are finding particularly troubling—if they knew what was coming, they could at least prepare, but for now, they’re not sure what to do other than moving their assets abroad.
In the current global economic climate, investors are searching for assets that have sustainability and predictability, which runs counter to the words of Philip Charls, CEO of the European Public Real Estate Association, who recently cautioned that European real estate investors “should brace [themselves] for a long period of volatility and uncertainty”. What’s worse, the current volatility is acting as a feedback loop and creating even more uncertainty, with France, the Netherlands, and Italy all having political parties in favor of leaving the EU.
For domestic investors, this influx of investment means increased competition for properties. At the same time, some opportunities may be opening up to invest internationally as European real estate prices dip due to the worries of uncertainty, especially for investors who are comfortable with a moderate level of risk and who have a long enough investment timeline to be able to ride out the volatility of the coming decade.
You might think that this influx of foreign cash puts the U.S. real estate market at risk of topping out, but economic signs continue to point to systemic market health and further stability. The Federal Reserve will likely increase interest rates slightly before the end of the year, as it did last December, but keeping the increase small should keep things stable going forward, at least for the next year. Strong fundamentals, including low interest rates and an economy that continues to show improvement are being cited as the main factors behind the optimism of both domestic and foreign investors.
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As a trusted due diligence consultant and asset manager, RMC Realty Advisors provides the necessary resources to critically evaluate real estate investments. Our expertise doesn’t only come from being able to find answers to critical questions—it’s knowing which questions to ask in the first place that can be crucial for the success of real estate investments.
Have questions about how your current or future real estate investments may be impacted by the Brexit. Contact us today to set up a consultation.