Post-Brexit ‘flight to quality’ begins

With investors flocking to the safety of US Treasury bonds and benchmark interest rate hikes on hold, a ‘flight to quality’ into US CRE seems inevitable  US lenders and analysts are eyeing a post-Brexit ‘flight to quality’ as investors seek the stability of US assets, currency and government (though the presidential election raises some serious […]

With investors flocking to the safety of US Treasury bonds and benchmark interest rate hikes on hold, a ‘flight to quality’ into US CRE seems inevitable 

US lenders and analysts are eyeing a post-Brexit ‘flight to quality’ as investors seek the stability of US assets, currency and government (though the presidential election raises some serious questions on the latter point).

This ‘flight’ has already started with the buying up of US Treasury bonds which, combined with Federal Reserve keeping interest rates historically low, may prove to be a boon to the US CRE market.

In the short amount of time since Britain voted to ‘leave’ the European Union, there has been a spike in capital buying US Treasury bonds, which are now looking relatively attractive to overseas investors. As of today, the yield rate on the benchmark 10-year note to 1.4052 percent, hovering at levels not seen since 2012.

Declining US Treasury yields comes on the heels of the Fed’s announcement on June 15th that the central bank would not touch interest rates this year, citing concerns about Brexit.

“A U.K. vote to exit the European Union could have significant economic repercussions,” Fed Chair Janet Yellen said before a Senate committee the week before Britain’s exit.

Now the “economic repercussions” are here, particularly in the UK; but the response from the US markets and government could ultimately buoy flattening real estate prices, some experts say. On the financing side of the equation, the Mortgage Bankers Association isn’t holding back, predicting another $500 billion in US CRE originations this year.

Kroll Bond Rating Agency noted in a new report that “asset pricing may also benefit from continued low rates in the US as the situation makes it more unlikely that the Fed will raise rates by year end.”

The newsletter continued: “The conventional wisdom is that the Brexit situation will prompt an uptick in foreign capital investment in US CRE and put downward pressure on cap rates. Should the downward pressure occur, it will likely lead to stable or even modest increases in property values.”

It’s too soon to say when and by how much these factors will impact US property prices, which flattened out the first quarter of this year, dropping a full point on the Moody’s/RCA CPPI index after six years of continuous growth.

But it is clear that the Fed has no plans to change its mind on rates anytime soon. “The general market feeling is that benchmark rates in the US will remain steady or decline,” said Christina Zausner, VP of industry and policy analysis at CREFC.

Most experts I spoke with aren’t surprised that the Fed decided to maintain its 0.25 percent to 0.5 percent US Treasury yield range set last December, the first hike in nearly 10 years, even though the Fed had previously said it would raise them several times in 2016.  

“There is pretty unanimous expectation that the Fed is now on hold,” said Martha Peyton, global co-head of research at TIAA. “I haven’t seen any forecasters expecting any kind of tightening before the end of the year at the earliest.”

But even if the Fed were to raise interest rates, real estate investors looking for higher returns will still come to the US due to a stable currency and relatively stable government, Zausner noted.

In addition, whether or not US real estate prices go up, the flurry of US Treasury bond sales is proving that the ‘flight to quality’ stirred up by Brexit has already begun.

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