Brexit: It’s (Not?) The End of the World As We Know It

The referendum, which was held on June 23, asked voters whether or not Britain should cede its EU membership. The slight majority answered yes, highlighting political tensions at a time when Europe is dealing with a huge immigration crisis.

While nearly half of the British population is less-than-thrilled with the result—to say the very least, U.S. real estate players may be one of the few groups to find a silver lining in the Brexit outcome, courtesy of the soon-to-be market volatility. For now, however, no reaction may be the best reaction—although it won’t necessarily be easy to keep calm and carry on.

“It’s in the very early days. Investors need to be careful not to overreact to one day of volatility,” said Kevin Thorpe, the chief economist at Cushman & Wakefield. “The terms of the divorce will be negotiated over the next couple of years, and the word I think that best describes the tone of the next six months is ‘uncertainty.’ The outlook for the U.K. and Europe will be uncertain in the near term, and that uncertainty will likely lead to a fall in consumer confidence and slower economic growth in the U.K. and in the European Union.”

In terms of the impact on the U.S., the major indicator to watch right now is the stock market, Thorpe said. Indeed, stock prices took a big hit. A few real estates companies in particular took a harsh beating post-vote, including CBRE and JLL, both of which do significant business in the U.K. CBRE dropped 9 percent to $27.31 in New York on Friday, while JLL fell 12 percent to $103.30.

“If we see a protracted plunge in the stock market, that will hit consumer spending, which will hit jobs and then eventually real estate in the U.S,” Thorpe said. “I believe that the initial reaction in the capital markets on the real estate side will be a great pause— I don’t think we’re going to see a lot of sales activity over the next week or two.  Instead,I think we’ll be in ‘wait and see’ mode to see how dark this really gets for real estate globally.”

While the U.S. may be pausing, several London-based financial services executives are already in full-blown panic mode.

“I think this is a house of cards. Now that we are leaving the whole of Europe will implode,” said a London-based investment banker who could not be named due to a contract clause barring talking to the press. “The far right in France are already calling for their own vote. Ireland wants a vote, and Scotland is heading for a second referendum. We’re moving backwards instead of forwards.”

Scotland voted overwhelmingly to stay in the EU, with 62 percent of voters choosing to “remain”. The majority of voters in Northern Island, 55.8 percent, also voted to remain.

A structured finance London-based trader echoed this sentiment, and didn’t mince her words. “It’s a bloody disaster,” she said. The trader went on to say that “the majority of voters still have no idea of the repercussions that will be felt from this decision. So much has been put in jeopardy, including thousands of people’s jobs working in international finance, and those that depend on trade lines with the EU. It’s a devastating turn of events, and will undoubtedly spell the end of the U.K. as we know it,” she said.

While the U.K prepares for the worst, the potential upshot for the U.S. is that this time of volatility may encourage a flight of capital to the U.S. and other safe havens in general, Thorpe said. “What we could see when the dust settles is global capital coming into the U.S. more aggressively, likely targeting the gateway cities such as New York or [Washington] D.C. Gateway cities and high-quality real estate in their markets could benefit the most from the vote.”

Multifamily assets may benefit the most from the market volatility, said Shimon Shkury, the the president of Ariel Property Advisors. “Since the end of the Great Recession, global economic turmoil has consistently attracted capital to New York and pushed up local real estate values,” he said. “New York City multifamily assets will potentially be the biggest benefactor since interest rates are now expected to remain low and demand may increase as investors seek only the safest opportunities.”

While New York may be an attractive place to park money as an investment, will the volatile economy make signing long-term leases in the Big Apple a daunting prospect? Or will a long-term investment be more attractive now, given the fact that London, another global finance capital,  may be suffering for some time? Only time will tell.

In the meantime, not all investors will be rushing to throw capital into the U.S., however.

“Europe-based banks, especially German banks, who are an active participant in providing senior debt for commercial real estate transactions, will take a step back and reevaluate their U.S. strategy,” said Piyush Bhardwaj, a managing director at CoInvestment Partners. “One of the major moving parts of Brexit will be the volatility in the currency markets. Europe-based banks providing debt in dollars could freeze their lending initiatives in the U.S. until further stability.”

In the last 12 months alone, German-banking giant Deutsche Bank has provided capital on some very notable deals in Manhattan. In conjunction with Bank of China, the bank originated a $1.5 billion construction loan for Related Companies and Oxford Property Group’s Shops & Restaurants at Hudson Yards at the end of last year. And in January of this year, Deutsche Bank led a $780 million financing for CalPER’s acquisition of 787 Seventh Avenue.

Post-vote, the U.S. dollar will likely strengthen relative to other currencies, and especially the pound, Thorpe said. “That will have an impact on exporting businesses in the U.S. The ones hit the worst are typically aerospace, agriculture and technology. The upside is that U.K. capital may now seek out the U.S. where it may not have previously,  and I think you’ll see a larger influx of European capital.”

On the reverse side, the majority of U.S. investors have a great deal of confidence in the long-term fundamentals of the U.K in general and London in particular, Thorpe said, and may be looking for opportunities to invest capital in the Big Smoke. “If you can weather the volatility you may be buying at a time where there is a lot of upside. I don’t think there will be a mass exodus of capital out of the U.K. There will be some who don’t want to ride out the storm and leave, and others who want in and think this is a great time to buy at a discount,” he said. “It really depends on how the U.K. economy behaves from this point forward. Opportunistic capital will see the U.K as a really great opportunity.”

Ric Clark, the chairman of Brookfield (BN) Property Group, which has two commercial real estate projects in London, said that the U.K. remains an attractive investment in general. “As long-term investors, we remain committed to London and the U.K., and are confident that the U.K. will continue to attract international capital and remain one of the leading business centres in the world,” he said in a statement provided to Commercial Observer.

The road ahead may be rocky for the next couple of years but don’t panic, say some, as the deal isn’t quite sealed yet. Britain’s vote to leave the EU is not legally binding. Article 50 of the Treaty on European Union sets out the procedure for a member state to leave the EU. It mandates that the member state first notify the EU of its withdrawal and requires the EU to negotiate a withdrawal agreement with that state. The vote alone is not a formal notification, which could take place in days or months, or later. Once Britain invokes Article 50—which will be the very first time it has been invoked—it has a two year window to negotiate a new treaty to replace the terms of its EU membership.

“I’d say the chances of it actually going through are only 50-50,” said a British, New York-based investment banker, who explained that the Brexit outcome may be used as a bargaining tool for new terms. When backed up by several other countries who are also threatening to abandon ship, the EU exit may not actually come to fruition. “Things can change here when everyone breathes for a second,” he said.

The London-based trader doesn’t fancy the chances of an about-turn, however. She noted a UK Government and Parliament petition currently circulating that requests a second vote. As the petition has received more than one million signatures—1,782,071 by 12pm EST today— it will now be addressed by parliament. But the trader believes that unless another vote is allowed, nothing will change. “You can’t have a referendum and disregard the result, unfortunately,” she said.

“The reaction [the day after the vote] is almost entirely fear-driven, and the U.K. is still very much a member of the EU,” Thorpe said. “That won’t change for a couple of years and may even be reversed, so today is a knee-jerk reaction, probably an over-reaction by investors. The stock market got really hot and the commercial real estate market got really hot, and investors looking for a reason to sell was evidenced in the market today. We saw that earlier this year when there were fears around China’s economy and the oil market, but that was quickly reversed over a couple of months.”

From a securitization perspective, “the market could see spreads widen as Europe-based buyers/investors flee to the sidelines in order for the dust to settle after this divorce [aka  Brexit],” Bhardwaj said in an email.

Sean Barrie, an analyst at Trepp, commented that “from a securitization perspective, the main thing we’ve noticed are some widening spreads in CMBX . Of course, the vote could pull some foreign investment in U.S. commercial real estate away, but that’s more of a hypothesis than a hard estimate.”

Tensions remained high as markets closed in London on Friday afternoon. “I’ve never felt so disconnected to the country in which I live in my life,” said Namuli Katumba, who works for a London global managed-services information technology company that has multiple financial services clients. Katumba pointed to a lack of direct and meaningful communication with voters prior to the referendum. “The fact of the matter is our government didn’t provide a message that resonated with the ‘people’—those people are not those that work in the City of London or European Platform.”

Only time will tell what the next two years will bring, but “it’s going to be a very messy and contentious divorce if this goes ahead,” said the New York-based British  investment banker.