The chill Brexit is sending through Britain’s real estate market could end up warming the hearts of investors in US commercial property. That, in a nutshell, is the view of Michael Hudgins, global strategist at EII Capital Management, an asset manager specializing in real estate.
Following Brexit and the British Pound’s fall, several UK real estate funds blocked investors from cashing out. Hudgins says Britain’s real estate pain is bound to increase interest in US commercial property.
Hudgins points to the more than $250 billion institutions want to invest in real estate. Before Brexit, a good chunk of that money would have gone to both the US and the UK, he says. “Given what’s happened in the UK, that’s going to be reconsidered,” he tells Yahoo Finance. “And we think on the margin we’ll see capital flows to US property as a safe haven.”
Those capital flows and extremely low yields on 10-year Treasury notes, Hudgins says, should benefit investors who buy stock in real estate investment trusts, known as REITs. REITs are publicly traded companies that invest in property including office and apartment buildings, shopping malls and warehouses. REITs pass on almost all their income to investors as dividends.
“Investors are going to be looking for alternatives where can they get yield,” Hudgins says. “US property on a risk-adjusted basis is well set up in that environment.”
EII Capital expects REITs that invest in office property to do well as investors shift funds out of the UK and invest in real estate in major American cities like New York and Los Angeles. Hudgins’ REIT picks include Hudson Pacific Properties (HPP) and SL Green Realty Corp. (SLG).
Hudgins rejects the argument that after several years of expansion, commercial real estate markets are going to slump and take REITs down with them.
“We’ve looked back in time and US property does not suffer significant value losses unless there’s a recession. Right now we do not see the excesses in the US economy that would suggest a recession is on the near horizon,” Hudgins says. “As a result we think US property will continue to grow rents, to grow cash flow at the property level and to distribute that to investors.”
In addition to office space, EII Capital sees value in some health care REITs that own hospitals, senior living facilities and other medical buildings. Historically, Hudgins viewed the stocks as expensive compared to the real estate they hold. But that’s changed, he says.
“Health care looks to be modestly less expensive but it’s also offering the highest dividend yield as a group among all the US REIT property types at about 5% versus about 3.6% for the entire group.”
Among the stocks he likes is Ventas (VTR), a company he says is well managed and has a diversified portfolio of property but limited exposure to skilled nursing facilities that may face cuts in government reimbursement rates.