By Kevin Thorpe, Global Chief Economist
With the best interests of our occupier and investor clients in mind, Cushman & Wakefield is following the next steps and impacts of Brexit closely. As our client managers and global research team advise clients around the world, here is what we know today:
What does this mean for the rest of the global economy?
One day does not make a trend.
There was a significant run up in the global equity markets prior to the UK referendum. So while this initial pullback is worrisome, it may reflect a repricing exercise; equity markets made the wrong assumption about the result of the British vote.
Fundamentals typically trump hysteria.
Recall that equity markets and the REITs demonstrated great resiliency earlier in the year when concerns flared up about the health of China’s economy. It is worth keeping in mind that China’s economy is nearly four times larger than the UK. After the hysteria about China calmed down, the economic fundamentals took over, leading equity markets and REITs to rebound swiftly in most regions of the world.
Two likely scenarios:
One so-so, and one scary. The growing consensus is that there are two likely scenarios: 1) The EU is able to hold it together without the UK. Under this scenario, there will be a small negative impact on the global economy and the US. 2) The UK exit leads to a larger Eurozone breakup. This darker scenario is expected to be more damaging and persistent for the global economy and the US (e.g. confidence/spending plunge, trade between Europe and rest of world slows dramatically, ultimately this impacts real estate as investor fear takes over).
US dollar likely receives a boost.
Nervous investors will pour foreign money into safety of the US, the globe’s reserve currency. Though the impact of a stronger US dollar is mixed, it does have its perks for the US economy. It could push down prices of imported goods – many goods and services could get even cheaper for the American consumer. This will in turn boost consumer spending, which boost business profits, which creates jobs, and ultimately strengthens the U.S. leasing fundamentals. Similar dynamics could play out with the Japanese Yen.
Downside of strong US dollar.
A stronger greenback will negatively impact US exports. Commodity and energy-producing markets in the US and the emerging markets may face renewed headwinds as global demand stumbles yet again.
Central Banks are all over it.
The Bank of England, the European Central Bank, Bank of Japan, Swiss National Bank, and the Monetary Authority of Singapore have all pledged to provide liquidity and deploy tools needed to maintain financial stability. US Fed-funds futures traders put zero probability of a US Fed rate hike increase in either July or September. There is now a 7% chance that the US Fed reduces rates by a quarter percentage point in the coming months.
APAC trade impacted, but only in certain spots.
Except for Cambodia, Vietnam, and Hong Kong, exports from most other countries in Asia to Britain are relatively small as a percentage of total economic output (1% or less). A rebounding China is likely the more important trend to watch in gauging the trajectory of most APAC real estate markets.
What does this mean for real estate investors and occupiers?
In the UK and Europe, investment activity too is likely to face some short term volatility as currency and capital markets react. Buyers and sellers will adjust their strategies. We are likely to see a flight to quality in the short term with opportunities emerging for those able to ride out the cycle.
We are unlikely to see a rush to sell. Many private equity funds had liquidity buffers of up to 30%, which will minimize the impact of any short term redemptions.
It is equally important to remember that during periods of uncertainty, there comes opportunity –as global events have shown us in the past. Those who take a longer term view cannot ignore the robustness and resilience of the UK market. It is a highly regulated, liquid and transparent market. The UK property market has been ranked a top five global investment market for decades; to be sure, some will see this as an ideal time to buy into a world class market.
In general, decision making will slow across the world as businesses pause to get a better understanding of the potential impact on their operations, but their occupancy decisions will likely be impacted more by local market conditions than global uncertainty.
Consumer and business confidence metrics will be some of the most important indicators to watch over the next several weeks and months as they have strong correlations with the leasing fundamentals and persistent trends in these metrics ultimately signal the future direction on vacancy and rents.
Kevin is Cushman & Wakefield’s Global Chief Economist, focusing on global economic trends and forecasts. He and the firm’s worldwide research team produce studies and statistics on topics affecting the global and U.S. economy, capital markets, finance, leasing fundamentals, property and project management and factors that affect supply-demand fundamentals in commercial real estate. Mr. Thorpe has developed several econometric models to predict market trends, is a member of the National Association for Business Economics (NABE), and has authored numerous studies and survey reports. He is also frequently quoted in publications. In 2014, Mr. Thorpe was recognized as the nation’s most accurate economic forecaster with the NABE’s Outlook Award.