Transwestern: U.S. CRE Benefits From Brexit
Britain’s recent Brexit vote could bring increased capital market volatility, but in the short-run, its impact has been generally positive for the U.S. and for commercial real estate, reported Transwestern, Houston.
The firm’s The Briefing report noted that investors’ “flight to safety” after the United Kingdom decided to leave the European Union drove down 10-year Treasury notes to a new low, just 1.39 percent.
“Expect low rates to continue for the foreseeable future, since the Fed is apt to postpone further increases until political and financial market uncertainty subsides,” Transwestern Chief Investment Officer Tom McNearney said. “In the meantime, foreign capital has been pouring into stocks and bonds and also is expected to seek refuge in hard assets like commercial real estate.”
McNearney said commercial real estate enjoys positive fundamentals and ample liquidity on the equity side but noted that the debt side contracted in first-half 2016, primarily in commercial mortgage-backed securities and bank financing. “Banks are responding to caution and criticism from their regulators as well as confusion over new Basel III regulation, which is being interpreted differently by lenders,” he said.
In addition, the Dodd-Frank Act commercial mortgage-backed securities risk-retention rules soon to take effect cast further doubt about CMBS capital requirement and structure, McNearney noted. Starting in December, CMBS issuers must retain 5 percent of every new deal issued or find a B-piece buyer willing to take on that risk.
“As a result, CMBS issuance lagged in the first half of 2016,” McNearney said, noting that only $31 billion was issued compared to $54.5 billion for the same period a year ago. “This has some worried about financing for the $200 billion wave of 10-year loan maturities over the next three years. While some of the slack is being filled by shadow bank lenders, we expect a spike in CMBS maturity defaults if new issuance remains at current depressed levels.”
McNearney said that first-half 2016 commercial sales declined 16 percent year-over-year, but he noted that many already expected 2015’s record sales to moderate this year.
Funds remain available for CRE investment, McNearney said–closed-end commercial private equity available funds, or “dry powder,” reached a record $236 billion in June. And Prequin, London, reported that the average current pension fund investment in real estate was 8.5 percent in the first half of 2016 compared to a 9.8 percent average target allocation.
McNearney added that Dow Jones Indices and MSCI will move real estate out of the financial sector and into its own sector starting on Thursday. “This is expected to bring $100 billion of inflows from equity funds into the real estate investment trust sector,” he said.
