Brexit Impact: ‘Uncertainty’ and a Positive for REITs

As investors flock to U.S. treasuries as a safe haven, the continued low interest rates will be a positive for US REITs, according to RBC Capital Markets

New York Stock Exchange. (Photo: Wikimedia Commons) New York Stock Exchange. (Photo: Wikimedia Commons)

(Ed. note: This story originally appeared on GlobeSt.com, ALM-affiliated publication.)

NEW YORK — The immediate response to the outcome of Thursday’s UK referendum on membership in the European Union was not positive, although the secession process won't begin for several months. Trepp LLC reported early Friday morning that as the results of the vote became clear overnight, 10-year Treasury yields fell 25 basis points and European stocks were off by 5% to 10%.

“A period of uncertainty is inevitable for the UK with the focus on political stability in the light of Prime Minister David Cameron’s announcement that he will step down from office before the end of 2016,” Amsterdam-based trade credit insurer Atradius said in a report Friday morning. Among other effects, British GDP is expected to decline by 1% to 3% over the next two years. “The structure of trade agreements over the coming two years will determine the longer-term impact,” according to Atradius. The UK has been a member of what is now the EU since 1973.

At Irvine, California-based HomeUnion, Steve Hovland, director of research, notes that “equity markets across the globe entered a tailspin” following UK voters’ surprising decision to leave the EU. “The gains achieved earlier this week as polling pointed towards a small likelihood of the UK staying were given back, along with the loss of billions in equity. The pound declined 10% against the US dollar to the lowest level since 1985. The Dow, S&P 500 and NASDAQ futures also plunged hours ahead of trading.”

Although the overall impact of the so-called Brexit won’t become clear for several months—for one thing, it will be up to Cameron’s successor to formally trigger the secession process, and then not until October—“uncertainty will send investors rushing to safe havens, including US Treasuries,” Hovland says. Accordingly, “investors and homebuyers can expect low interest rates for longer and a pause on interest rate hikes from the Fed until at least September.”

(Check out all of ThinkAdvisor's news and analysis on Brexit.)

That continued low interest rate environment will be a positive for US real estate investment trusts, according to analyst Rich Moore with RBC Capital Markets. “The industry could outperform the overall market by 100+ basis points today as investors seek security and stable cash flows,” Moore wrote in a note to clients Friday morning.

Moore gives high marks to the outlook for health care, net lease, office and multifamily REITs in view of the Brexit vote, albeit for different reasons. For healthcare and net lease, it’s the effect of low rates, while office REITs could reap the benefits of employer exodus from the UK and Europe and apartment trusts should benefit from “a potential increase in domestic employment.” Conversely, lodging and industrial are expected to see negative impacts from the Brexit fallout, Moore wrote Friday.

That being said, one net lease REIT with UK exposure, New York City-based Gramercy Property Trust, sought to assure investors Friday. “Gramercy owns an 80% interest in three high quality logistics assets in the United Kingdom as well as a 50,000-square-foot office facility in Coventry, England,” according to a company statement. “All of these assets are owned without leverage. Gramercy, as previously stated and in line with the company’s disposition plan, plans to dispose of all of these assets over the next 12 months.”

Longer term, Hovland sees “global contagion” as the wild card in the Brexit aftermath. “A downgrade in the UK’s credit rating by the S&P, which is very likely, could tip the country into recession,” he says. “The rest of the globe is also barely growing, and a financial shock could diminish confidence in the central banks and send much of the world into contraction.”

(Check out all of ThinkAdvisor's news and analysis on Brexit.)

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