Manatt's Tom Muller: Brexit Will Cause Deal Flow Reduction

It seems very likely that US real estate stands to benefit greatly from the U.K.’s self-destructive move, says Tom Muller.

Britain’s historic vote to exit the European Union is sending shock waves throughout the global economy, and will have economic and political repercussions for years.  What are the likely impacts on US real estate? Manatt, Phelps & Phillips ‘ Tom Muller , co-chair of the land use and real estate group takes a closer look in the exclusive commentary below. The views expressed below are the author’s own. The first thing that is clear is that no one really knows what the effects of this withdrawal will be.  It is that almost unprecedented degree of uncertainty, in itself, that is likely to cause a significant short-term reduction in deal flow during 2016 as investors stop to take a breath and attempt to figure out what will happen and how best to take advantage of it or protect themselves from the fallout. Brexit dramatically undermines investor confidence in both the U.K., but also raises the specter of additional defections from the European Union, thus undermining confidence in Europe in general as a safe haven for investment in any type of asset, including real estate.  Presumably in the longer run, this will favor investment in the best remaining alternative, U.S. real estate, at least for as long as the U.S. is viewed as a predictable and stable economy. Even before Brexit was viewed as a serious possibility, foreign investment in U.S. real estate increased steadily since 2010, almost doubling from 2014 levels to nearly $90 billion in 2015, and on pace to exceed that in 2016.  Real estate in the U.K. in general, and London in particular, have for a long time been the strongest competition against U.S. real estate for investors seeking high quality assets, particularly among Chinese investors, who have the largest share of foreign investment in the U.S. It now seems likely that Brexit will greatly reduce that competition for the foreseeable future as the British economy inevitably declines and many jobs, particularly in the financial sector, move from London to other European capitals or the U.S., reducing in particular the values of office and industrial properties. Thus, high quality real estate in the US just became appreciably more valuable, following closely on the heels of the changes to FIRPTA in late 2015, which significantly encouraged investment in U.S. real estate and REITs by foreign pension funds. On the other hand, U.K real estate investors have generally been in the top five countries by percentage of offshore investors in U.S. real estate, and it would be surprising if the economic fallout from Brexit allowed them to continue at that pace. Also, the British government may well need to artificially raise interest rates in order to attempt to protect the value of the British pound, and that rise in interest rates may be the catalyst for the long-anticipated general increase in interest rates, with the resulting negative effects on property values. In general, though, in the long run it seems very likely that U.S. real estate stands to benefit greatly from the U.K.’s self-destructive move, at least for as long as the U.S. refrains from following suit.