Thanks To Brexit, There's An Opportunity In The U.S. Mortgage Sector
History was made on June 23 when the UK voted to leave the European Union. But Brexit left more questions than answers, especially in the United States and global commercial mortgage investment sector.
Case in point: While the prospect of untangling the UK from the European Union may take several years, there are key ramifications from Brexit for commercial mortgage investment firms and their clients of high net worth individuals, family offices, trusts, and institutional investors. "In the short-term, company financial decision makers can expect significant market and currency volatility. But for the long haul, events should depend heavily on how the UK exits its 30-year relationship with the EU," said Robert Scanlon, chairman and CEO at ScanlanKemperBard, a privately-held real estate merchant bank with $3.82 billion in portfolio assets based out of Portland, Oregon.
To understand Brexit's potential impact on the US, it’s important to understand what's happening and why. "Part of the economic convulsions can be attributed to the fact that if Britain can no longer benefit from the free movement of capital, products, services and people, then Britain-based businesses that sell to European countries will suffer,” says John Seggerman, a real estate industry analyst based in Falls Church, Va. "In addition, there remains some uncertainty in the U.K. political world as British leadership may have second thoughts about the whole matter while there may be other intra-British struggles. Finally, Scotland is rumbling with calls for a second referendum for secession because of its wish to remain in the European Union."
You can expect the following issues to top any financial and investment "to-do" list in a post-Brexit mortgage world:
Knowns And Unknowns
After Brexit there are "known" and "unknown" takeaways for the commercial mortgage sector. The "knowns" mostly include a move to safe assets like gold, REITS, and U.S. Treasuries. The "unknowns" include the long-term risk of investing capital into a post-Brexit Europe.
Real Estate Outlook
Real estate investments in the U.K. will slow as both local and multinational firms hedge their bets. However, that cash may not sit on the sidelines. Instead, it may be redirected to the U.S. real estate market, which is now viewed by investors as relatively solid and stable compared to the U.K. and the rest of Europe.
Separate Currencies Help With Transition
Any economic decline could be short lived, depending on how the U.K. removes itself from the Eurozone. But having separate currencies should help.
Since Brexit, the British Pound has gone down against the Dollar. That means higher market volatility — although post-Brexit currency trends should lead to sliding fuel costs and lower prices for imported goods. One possibility is that U.S. commercial real estate firms could suffer as export prices rise, potentially leading to decreased demand for industry sectors that are linked to trade and manufacturing industries.
U.S. Interest Rates Will Remain Low
To stabilize the U.S. and world economies, the Federal Reserve will likely keep interest rates low. That should benefit commercial real estate investment firms and their investors since they can continue to depend on lower rates from U.S. and international banks.
Brexit should serve as a boon to the U.S. commercial mortgage sector. Spooked global investors will likely turn to the commercial real estate market for dependable returns since safety and yield will increasingly become priorities.
While time is the ultimate arbiter, commercial real estate decision makers will need to capitalize on the flight to safety by international investors. These decision makers can also establish a blueprint in a revamped Eurozone that will rely on new foreign capital inflows that are directed towards high-quality and well-located assets.
"By and large, the optimal financial shelter is the United States on a world-wide basis," says Scanlon. "We’re already seeing the U.S. dollar on the upswing, both against the British pound and other key global currencies. Nobody in the commercial real estate market sector has a crystal ball but we can expect a broad-based move away from UK real estate properties and a shift of assets toward more reliable U.S. commercial real estate bourses like New York City or San Francisco."
"That in turn should hike property values in large, economically viable urban sectors across the U.S., and generate higher profits for commercial real estate investors who’ll also be operating in a low interest rate environment — giving them abundant opportunities to reinvest profits into new real estate properties," Scanlon adds.
Still, long-term volatility and uncertainty over Brexit makes it difficult to peg any future bets on the U.S. and European commercial real estate markets. "In the short term, at least, the U.S. commercial real estate sector appears to benefit from the Brexit vote, as investors increasingly see the market as a safe and dependable harbor in stormy economic seas," says Scanlon.
Marvin Dumont covers business news and emerging trends for The Huffington Post, Entrepreneur.com and other outlets. He served as senior editor for two Fortune 500 companies and holds two content certifications. Dumont earned MPA, BBA and BA degrees from the University of Texas at Austin. Email him at firstname.lastname@example.org.
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