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Brexit may trigger flight to US quality

The day after 52 percent of referendum voters in the UK cast “leave” votes, US Treasury yields had dropped to the lowest rate in five years, and US stocks have been battered. But CRE lenders remain confident that the US real estate finance markets could benefit as the picture in the UK becomes bleaker.

British real estate lenders expect that Brexit will slow job growth and potentially lead to a recession in the UK, which will shock the CRE markets that had already slowed considerably leading into the vote — and that could make the US that much more attractive, lenders told Real Estate Capital.

“So far, investors are rearranging their assets to lighten up on the UK in favor of the US,” said Martha Peyton, managing director and head of research for TIAA Global Asset Management’s real assets division. Peyton pointed to the 10 percent decline in the exchange value of the pound versus the dollar since June 23rd as a possible cause.

Hans-Christian Ritter, EVP of Helaba Bank, added that his bank’s investments into London acquisitions could be affected, as the availability of financing in the UK appears to be on hold.

“The real estate market in the UK is not going to be a pretty picture from any perspective,” he said. “If people need parking spots for their investments and they feel that the London market is slightly unpredictable, they might come here.”

This all could provide a much-needed boost the US property finance, which is thought to still be fundamentally sound but has experienced plenty of setbacks over the past year. Notably, CMBS originations were already weak prior to the British referendum, stemming from concern over risk retention requirements and pricing volatility. US CMBS spreads have widened as a result of Brexit as well.

Banks’ appetite for construction lending has also waned as this real estate cycle progresses. A flight to quality US assets could stimulate more competition among various lending groups, which would also include non-bank lenders, insurance companies and Mortgage REITs.