Many experts believe that Brexit will create a flight to quality into US commercial real estate, but foreign money is likely to increasingly target secondary markets, one prominent real estate lawyer tells Real Estate Capital.
Jim Carolan, a partner and head of Withersworldwide’s US real estate practice, noted that with an already prohibitive legal and tax environment and a weakened economy in the UK, foreigners will increasingly choose to invest in the US instead.
But, due to the additional competition anticipated, he said clients have already “started looking outside of their comfort zones, outside major money centers and into secondary markets.”
“Smart foreign capital” is likely to be invested in assets tied to major growth industries, such as tech, seniors housing and e-commerce logistics centers, Carolan added.
The flight to quality into the US has continued at a steady pace in recent years and is likely to increase as fears mount that the UK, which already had a fragile economy leading into the Brexit vote, could be headed towards a recession.
The governor of the Bank of England, Mark Carney, announced this week that regulatory capital buffers on banks would be reduced to help boost lending to households and businesses in what was seen as an effort to prevent a recession.
But the impacts of that move may have on the UK’s economy are not yet clear. And foreign flows of capital into UK commercial real estate had already dropped 50 percent in the first three months of 2016, only to fall further in the second quarter, Carney noted.
A continued or intensified flight capital into US assets can only stimulate more competition among US lenders, who could follow foreign investors into secondary markets in search of greater yields.
However, as worries mount regarding the UK’s economy and commercial real estate markets, this could also create significant distressed buying and financing opportunities in the UK, Carolan noted.