It’s been over a week since the British vote to exit the European Union, and the situation is worsening for property owners in the UK. The greatest impact is happening in the financial markets. Real estate Investment trusts (REITs) are experiencing increased redemption causing some of the biggest funds to halt outflows as a means to protect values for existing investors. The three funds- run by Standard Life, Aviva Investors and M&G Investmentseach “pointed to heightened levels of stress in the market prompting investors to sell,” as reported today in the New York Times. Here are a series of likely impacts for US firms with property holdings and operations in the UK:
· The uncertainty of the Brexit impact will increase EU regulatory scrutiny which will impact earnings negatively
· Financing will be increasingly difficult putting downward pressure on loan to value coverage.
· The limitations on immigration will put stress on labor availability, and most likely cause labor rates to increase.
· Tenants will reassess current leases and attempt to renegotiate lease term and rates.
· There will be increased uncertainty relative to the regulatory environment.
· Reassessment of legal and tax obligations will certainly be required. Contractual obligations with UK entities may require renegotiation.
· CRE managers can expect continued low cap rates in the US as the Federal Reserve holds the line on interest rates. However the volatility and risk in the UK finance markets may result in higher rates that will offset lower Federal rates.
· The British pound will continue to weaken, impacting earnings and capital values which may lead to significant “mark-to-marketlosses,” according to a recent report from Deloitte.
· Perhaps one of the greatest areas of uncertainty relates to the possibility of other member countries exiting the EU. US CRE managers will most likely have to re-evaluate their entire European portfolio along with their UK portfolio.
· Political upheaval in European countries may lead to further exits from the EU as a result of elections in France, Germany, and the Netherlands, compounding the market and financial risks.
Conclusion: The Brexit vote has created a firestorm of uncertainty with the greatest impact happening in the UK property markets. The ripple effect of distress in the banking industry, declining currency values, pressure on redemptions, downwardpressure on rental rates, all will wreak havoc on US CRE managers with leases and real estate investments in the UK. Amidst the chaos comes possible opportunity. CRE managers should be alert to opportunities to renegotiate lease terms and rates wherever possible and to consider strategic investments as the markets continue to deteriorate.