And now comes the Brexit—the breakfast no one is having fun digesting.
Suffice it to say, the uncertainty has not been pleasant, especially for hotel REITs, whose share prices are tied to the health and confidence both in travel and real estate fundamentals.
Antithetically, the Brexit is having both a negative and positive impact on REITs.
Real Estate Side
From a real estate perspective, the Brexit is propitious: Whenever there is a black swan-type event, the first thing investors do is seek out safety. The U.S. real estate market is that haven. "The continued flight to the safe harbor of American properties in gateway markets like New York and San Francisco reflects persistent economic and political instability in other parts of the world," Sam Chandan, founder and chief economist of Chandan Economics, told CNBC. "The UK's decision to exit the European Union underscores the U.S. investment thesis and could trigger a new wave of foreign capital inflows to high-quality, well-located assets."
"Interest rates are low, going lower and will remain lower," said Michael Bellisario, an equity research analyst at Robert W. Baird. (The Federal Reserve has said that it will keep rates low, at least through 2016, causing investor funds to tap into REITs searching for higher yield.) "Its benefitted all real estate and more foreign capital flow into the U.S. will only help hotels. Values in the near-term won't be negatively impacted."
There's just one catch. The uncertainty from Brexit will disproportionately benefit sectors that are outside of hotel: office, apartment, retail—and those REITs that have exposure to those asset classes.
"Those sectors are viewed more bond like by investors and foreign investors have a very different cost of capital than U.S. REITs and private equity," Bellisario said. "They are looking for capital preservation, not appreciation, and those are safer investments."
In terms of markets, New York is always front and center. "Large institutional investors pay for New York, as they look at it more as a store of value," Alexander Goldfarb, senior REIT analyst at Sandler O'Neill, told CNBC. "They're looking to park capital. Foreigners, high net worth, really look to New York. If any sector is going to be the biggest beneficiary, it's that."
Chinese buyers, who have committed an exorbitant outflow of capital, are focused on high-profile gateway markets and on most asset classes, including office and hotel.
While real estate transactions should continue to hum along in the U.S., bolstering valuations in the process, the flip side to all of this is the probability that travel to the U.S. could dampen. The culprits: a weaker pound, stronger dollar, which could have those rethinking a New York trip in favor of, say, London. As Seeking Alpha pointed out: "Lodging REITs are dependent on a steady stream of overseas tourist money, and the dollar's continued surge vs. everything not named the yen promises to crimp foreign visits."
Bellisario is in a similar camp. When the Brexit happened it was "the New York-focused REITs that got hit hard because that's where the most inbound international inbound travel comes to—and the stronger U.S. dollar doesn’t help; we saw that in late 2014 and 15," Bellisario said. "Consumers who might want to go on vacation might rethink New York and go to London."
The scenario is not that much better for corporate travel, which makes up about two-thirds of hotel demand across the U.S. The impact to business travel might hurt REITs exposed to gateway markets."If I'm a business in London and have workers going to the U.S., I may say, 'We don’t know how this will play out; we may turn the dial back a little bit,'" Bellisario said.
The real threat to REITs, Bellisario argues, is the unknown—the fundamental impact from the UK leaving the European Union and how that will affect global travel. "That's the thing to focus on," he said.