As the global volatility and fear of a prolonged economic downturn grips international markets, the US real estate sector has become an unintended beneficiary of foreign capital largesse. In the aftermath of Brexit and the continuous, unchecked fall in the Chinese stock markets, capital flights from these countries have found their way into American real estate, not just in the gateway cities and second tier cities like New York, San Francisco and Los Angeles but also in the third tier and sunrise cities like Denver, Atlanta, Boston and Washington.
Impact of Brexit and global economic downturn
Although Brexit has sent chills down the spine of the global investment community and made them jittery about the prospect of investments in British real estate, especially in London, once considered a safe haven for parking excess capital, they have better opinion about the US real estate scene which is backed by strong local economies and tangible assets. Although the world economy has become more interdependent over the years and the US job scene is far from ideal, the US Fed is still in a position of strength compared to either Bank of England or the European Central Bank.
Moreover, in cities like New York and San Francisco, the rent of prime properties have consistently been among the highest in the world and these properties supported by a robust US economy also acts as a hedge against inflationary trends. Investors from Europe, China, Middle East and other major economies like India and Brazil are now targeting properties in Tier 3 cities as well where the scope of growth is much higher and which are still relatively guarded against Federal fiscal tightening policies.
Although the final impact of Brexit on global economies are yet to be felt, US commercial real estate and REITs will provide safe harbor in a petulant, unpredictable weather. Even a country like Brazil which had been relatively stable and dissociated from global turmoil has finally become restless and has recently seen a return of the right-wing parties to power after the ouster of Dilma Rouseff on corruption charges. Investors in the country may consider US real estate as an option to hedge against domestic volatility since the new government doesn’t seem to have the mandate to rule.
China had seen double digit growth for close to three decades. The stock markets created and broke many records. However, for the last couple of years, the market has witnessed a freefall. Many Chinese visionaries had predicted it beforehand and started shifting capital from China and places like London to the US shores as the focus shifted from high yields to relative stability and nothing provides more stability than US real estate. They have bought many of the commercial spaces as well as buildings at prime locations and as the second largest economy of the world adjusts to a new growth narrative amid tension, more investments can be expected from the country.
With the US Fed expected to hold the interest rates low, the yield on government bonds and fixed income instruments will be less than favorable and so real estate will be a more attractive investment option for foreign as well as domestic investors. This will help it to sustain above average growth for a fairly long time.