UPDATE: The Brexit Impact on Apartment Investment: U.S. Sector Could See Gains
Shared post from Axiometrics | KC Sanjay
Great Britain voters decided on June 23 to leave the European Union. The somewhat surprising 52%-48% result — the “remain” side had a narrow lead in the final pre-vote polls — was capped by Prime Minister David Cameron’s announcement that he would resign.
Analysts are mixed about the effect the “Brexit” from the EU will have on the British economy, but the decision could make an impact on apartment investment in the United States, Axiometrics economists say.
International investors have been increasing their holdings in the U.S. over the past several years, as they have gained a better understanding of the American apartment market and appreciation of the sector’s profitability. Before recently, the idea of professionally managed properties of 300 units or more just didn’t translate.
But international investors sunk $16.3 billion into U.S. multifamily in 2015, about 11% of the record $150 billion worth of transactions in the sector, according to Real Capital Analytics (RCA). While Canadian investors provided the lion’s share of that international money ($11 billion), those from Great Britain had the second highest concentration at $2 billion.
The Brexit could decrease the value of British real estate, at least in the short term, as the United Kingdom attempts to first negotiate its way out of the EU, then seeks new trade deals on its own. That could send British speculators looking for someplace safe to spend their investment pounds and shillings, and the United States has one of the most attractive apartment markets in the world, according to Axiometrics economists.
Multifamily – comprising apartments, condominiums, student housing, senior housing and other products – is one of the five primary commercial real estate sectors, along with retail, office, industrial and lodging. The sector accounted for 25%-30% exposure of all commercial real estate portfolios in 2015 and the first quarter of 2016 – meaning multifamily is bringing in more than its share of investment compared to other sectors.
Meanwhile, the U.S. government made international investment in America easier by easing the tax burden on many of these deals. For example, a non-U.S. investor can now own up to 10% of a REIT before incurring federal taxes – up from 5%. This December 2015 action also exempts certain foreign pension funds from taxes from their U.S. property holdings.
Not only might British investors seek safety in the United States, but patrons from other nations could look to shift some investing from Britain to the U.S., according to Axiometrics’ economic analysis. London and New York, in that order, are the most popular locations for international investment. A weakened London market could spur more money toward New York, where 32% of 2015 multifamily investment was from outside the U.S., according to RCA.
Investors from the Middle East, who have long favored London, could be ready for a bigger bite of the Big Apple if they see profitability falling in Great Britain.
On the other hand, a post-Brexit British recession – one of the potential scenarios prophesied by economists – could depress U.K. apartment values so much that U.S. investors might see a “buy low” play overseas and spend some investment dollars on London flats.
Cameron bucked many of his Conservative Party patrons by urging his constituents to vote to remain in the EU, a position also held by much of the Labour Party and U.S. President Barack Obama. The rapidly emerging United Kingdom Independence Party (UKIP) is among the most vociferous supporters of the “leave” movement. The political ramifications beyond Cameron’s resignation could be significant.
Had voters followed Cameron’s lead and elected to remain in the EU, international investment in U.S. multifamily would have likely remained on its current trend line: Steadily increasing as market strength and investment conditions improve.