The UK's vote to exit from the European Union has given way to uncertainty that is radiating through global markets and down into the commercial property investment and travel markets.
Where to Invest?
One school of thought says that now, in light of the depreciated currency, would be an advantageous time to invest in British real estate, namely in London. Consider Indian investors. Subsequent to the Brexit, reports from India surfaced that more Indians were expected to buy property in the UK now that it was deemed cheaper.
“The combination of lower prices and devaluation of the pound should draw in Indian investors looking to acquire assets in the UK," noted Shishir Baijal, chairman of India unit of UK-based property consultant Knight Frank. "London has always been a favorite destination for Indian property buyers and it augurs well for Indian investors to make their move now."
Others see it differently—that investment in the UK right now is a risky play with all the uncertainty. "International hotel investors may now prefer to make their investments in the U.S. instead of Britain," said John Montgomery, managing director at consultancy Horwath HTL. "Britain's economy may be perceived to be somewhat uncertain/risky."
His colleague in London, James Chappell, global business director, is equally dubious. "This is a huge challenge because London has traditionally been seen as an iron clad, safe place to park cash with a guaranteed return," he said. "What will the appetite of investors to risk their cash be in a market where nobody knows what the rules are going to look like? The commercial real estate market is braced to take a hit for that very reason and hotels will not escape unscathed either. Things will change, but nobody really knows how. This alone will put off investors from the London market."
Chris Mumford, managing Director of AETHOS Consulting Group, is in the same camp. "In terms of investment into the UK sector, the current uncertainty over what happens next, and what the long-term picture looks like, is likely to linger and will likely deter investors from looking at hotel real estate," he said.
The upshot is that it could trigger more property investment in the U.S., particularly from Asian investors. The U.S. market could use it: According to Paul Breslin, also a managing director at Horwath HTL, transactions have slowed dramatically of late in the U.S. "The positive is the stability of the U.S.," he said. "Asian buyers are looking for solid, steady assets, and aren't concerned with buying at a 7 cap. Their threshold and tolerance is higher. We could see more buyers."
In a CBRE Viewpoint entitled "The Long Goodbye," authors Neil Blake, head of EMEA research, and Miles Gibson, head of UK research, discuss the impact on property development, construction and investment.
They write that development and construction could be particularly affected by the Brexit. "Developments not yet started are likely to be delayed until there is more clarity about the level of demand in the economy," they wrote.
However, there could be less impact on investment in the UK. "Investment sentiment depends much more on the outlook for the UK economy than on its strict relationship with the EU," it read. "Intrinsic attractions of the UK mean that it looks likely to remain an attractive property investment destination."
What the Brexit Means for Travel
If there is any stoppage of investment into the UK, travel there, on the back of a softer currency, could see a boon—at least for the short-term, said Horwath HTL's Chappell. "It will probably be positive as a combination of a weak pound, making London much more affordable, plus the desire to travel before any possible restrictions kick in," he said.
He's less bullish long-term. "Who knows what the new Visa and travel requirements will be," he said. "Whatever happens, it will probably be more complicated to go there from the EU and that means less travel."
The weak pound, noted AETHOS' Mumford, will have a profound impact on travel to Britain. "We may see an immediate positive impact on UK tourism in the form of increased visitation," he said.
The Brexit also may mean less travel into the U.S. "The concern is when you have a devaluing pound, you may see a sharp decline in people who may have otherwise traveled to the U.S.," Horwath HTL's Breslin said. "If their economy slows down, it hurts travel to the U.S.
Any slowdown in travel to the U.S. could hurt REIT stocks, which have already been in pain, even though the bulk of U.S. REITs don't have exposure to Europe,.
David Loeb, who covers hotels for analyst Baird, noted that inbound international travel implications is "the biggest unknown for the hotel REITs" following the Brexit vote.
"Full-service companies are disproportionately exposed to East Coast gateway markets and could be impacted if inbound international travel slows," he said.
According to Loeb, travelers from the UK and the EU represent approximately 5 percent and 11 percent, respectively, of inbound international travel into the U.S. "We believe greater political uncertainty in Europe could potentially cause a slowdown in corporate spending, which, when combined with the stronger U.S. dollar, could result in international inbound travel growth slowing further at a time when the industry is already grappling with sluggish domestic corporate demand."
It's not all bad news: foreign capital could help soften any potential blow, Loeb noted. "The bright spot for hotel REITs remains asset valuations as strong foreign capital inflows support pricing; despite the stronger U.S. dollar, we believe these inflows could potentially accelerate as investors flock to the relative safety of the U.S. following the Brexit referendum."