Brexit Turbulence Makes U.S. Real Estate Attractive for Investors

Earlier this Summer global equities dropped by $3 billion, marking it as the largest two-day stock decline in history.  The United Kingdom’s vote to leave the European Union sent ripples of fear through financial markets around the world. Fortunately, those tremors in the market faded quickly, with the Dow Jones climbing back above 18,000, but the move leaves a lingering risk to financial stability in the U.S.

The vote was just the first part of the Brexit process. Because of that, it is important to note that while stocks were tumbling some investments were not so easily shaken.

U.S. real estate remains healthy, despite Brexit

During these tumultuous times within the stock market, residential real estate was experiencing a boost driven by the volatility associated with Brexit. Mortgage rates headed back towards all-time lows after the 10-year U.S. Treasury yield shrank from 1.75 percent to 1.39 percent. Prior to Brexit, mortgage applications were down 2.6 percent but in the week following, the Mortgage Bankers Association estimated that they surged by 14.2 percent. Nearly 62 percent of those applications involved refinance loans as homeowners rushed to cash in on lower rates.

Mortgage rates have since risen slightly and applications have leveled out but projections for the rest of 2016 are solid. Freddie Mac predicts that housing is on track to have its best year in a decade, with a strong possibility of mortgage rates remaining around the 4 percent mark.

Commercial real estate is also holding steady. Data from the Federal Reserve shows that commercial real estate prices have increased at a faster clip than residential properties during the economic recovery, reaching historic peaks through 2015. Figures from the Census Bureau demonstrate that commercial construction spending is up, increasing by 17.1 percent between May 2015 and May 2016. Office construction saw the biggest leap, with a 19.5 percent spending hike.

Prices are expected to rise by 3.6 percent over the next three years, which represents a marked slowdown from the 12.7 percent increase reported in 2015 alone but confidence remains high. National law firm Akerman LLP's seventh annual U.S. Real Estate Sector Report found that 92% of real estate executives are just as optimistic about commercial real estate’s future today as they were one year ago. Strong fundamentals, including low interest rates and an economy that continues to show improvement were cited as primary drivers behind the positive outlook. And the possibility of a correction is seen as a healthy part of the market’s cyclical nature.

Looking ahead to the rest of 2016, 59 percent of executives included in the Akerman report agreed that multi-family housing will be the most active commercial real estate sector. Rent prices are up 4 percent year over year according to the Consumer Price Index while vacancy rates have dropped to 4.5 percent. Even with prices expected to level off, optimism remains high where commercial real estate’s future is concerned, regardless of the ongoing upheaval in the U.K.

That’s further reflected in the fact that real estate investment trusts have been relatively unruffled by Brexit. The National Association of Real Estate Investment Trust’s all REIT Index showed gains of 6.68 percent through the end of June, compared to a meager 0.26 percent for the S&P 500. Overall, NAREIT’s’ midyear report shows returns of 16.55 percent through the third week of July. If anything, REITs have benefited from the lower rates triggered by Brexit.

Real estate thus proves resilient in at least a few different ways.

Brexit isn’t the first time that stocks have been threatened in 2016. Earlier this year, the markets saw serious fluctuations as a result of China’s economic troubles. January turned out to be the worst month for Chinese equity markets since 2008 and that turbulence manifested itself in the U.S. stock market. The Dow lost 5.5 percent of its value while the Nasdaq saw an 8 percent decline.

In addition to the uncertainty in China’s markets, falling oil prices have been another source of frustration for equity investors in recent months. Despite there being no direct correlation between stocks and oil prices, the two have been shown to have a tendency to move in sync with one another, much to the chagrin of investors.

Back in January, for example, crude oil prices fell below $27 a dollar barrel for the first time since 2003. Petroleum stocks took deep hits, with the energy sector dipping by 15 percent. Just a few days after reaching that low, oil prices skyrocketed back up 9%, taking stocks along with them. For the equity investor, January was nothing short of a nail-biting rollercoaster ride.  

Real estate, on the other hand, offered a less volatile opportunity for investors to strengthen their portfolios. As the financial markets were going haywire, the housing market saw existing home sales climb, resulting in an 11 percent year-over-year increase. Over that same period, the National Association of Realtors estimated that the median home price rose by 8.2 percent.

Commercial real estate also started the year on solid ground. According to NAREIT, commercial real estate transactions totaled $139 billion in January, with sales up by 15.3 percent over the previous year. The takeaway? Even though stocks were tanking, it didn’t put a damper on real estate and property investors were poised to reap the benefits.

While some might point to the 2008 housing collapse as a weak point in real estate’s ability to endure, even that yielded a win for some investors. For those who were willing to be greedy when others were fearful, there was a tremendous opportunity to invest in properties at values well below replacement cost as home values were plummeting and the Dow Jones was recording its worst one-day drop on record.

Brexit has positive implications for U.S. real estate’s future

In the U.K., the financial turmoil surrounding Brexit is ongoing. The impact that it’s had on the real estate market in particular has been very different than in the states. In the months leading up to the referendum, home prices had risen sharply, reaching double-digit gains in some of Britain’s larger cities. That’s expected to reverse, however, as Brexit’s impact is more fully felt.

French bank Société Générale is predicting that a price correction of between 40 percent and 50 percent isn’t unrealistic in some of London’s high-end residential areas. Things aren’t looking so rosy for commercial real estate in the UK either. A survey conducted by the Royal Institution for Chartered Surveyors (RICS) found that investor confidence has lost steam following the U.K.’s decision. Foreign investors in particular appear to be backing off the most, with demand declining by 27 percent.

While that’s certainly bad news for property owners and developers in Britain, it’s even more good news for U.S. real estate. Foreign interest in residential and commercial properties was already high prior to Brexit. Between April 2015 and March 2016, for example, foreign buyers purchased $102.6 billion in residential properties, with more than half of purchases taking place in Florida, California, Texas, Arizona and New York.

According to Colliers International’s 2016 Global Investor Outlook survey, 79 percent of investors polled anticipate investing in U.S. real estate within the next year. Sixty-one percent of investors included in the survey chose office space as the most popular property choice, followed by industrial properties, developments and shopping centers.

Ironically, London was singled out as the number one city on global investors’ radar, followed by New York, Los Angeles and San Francisco. In light of what’s happening with London real estate and U.K. real estate as a whole, U.S. real estate certainly holds more appeal for investors who have seen their risk appetite decrease.

China is a prime example. To date, Chinese investors have established a $300 billion stake in the U.S. real estate market. In 2016, they’re expected to pour another $30 billion in residential and commercial properties according to a joint report from Rhodium Group and the National Committee on U.S.-China Relations. That trend seems likely to prevail as uncertainty lingers over China’s economic situation. More than half of the executives included in the Akerman report believe that China will be the dominant source of foreign capital across all U.S. real estate sectors moving forward.

As the U.K. struggles to find its footing in the aftermath of Brexit, more questions are being raised about its long-term impact in Europe and abroad. While there are no easy answers at this stage, one thing is clear: investors can take comfort in the stability that U.S. real estate continues to offer.