New York has replaced London as the world’s leading destination for foreign investment in commercial real estate after fears of the British capital’s appeal of being a global financial center would diminish set in when the United Kingdom decided to leave the European Union.
According to the data on cross-border property transactions, there has been unease among investors in the run up to the referendum captured in capital markets prior to the vote. The approval to leave on June 23 was largely unexpected.
The exit of Britain from the EU caused property investor fears that London’s role as a premier financial center would erode and affect the value of their property investments, most of which are office buildings.
The sovereign wealth fund of Norway is one of Britain’s largest foreign investors, and on Wednesday, it announced that it was going to reduce the value of its property portfolio in the UK by 5 percent after the vote.
“It would be fair to say that London bore the brunt of Brexit fears,” according to David Green-Morgan, director of global capital markets research for JLL in Chicago in an interview. “The big fear is that London will lose a lot of the financial service jobs that has made it such a global financial center.”
New York experienced a gain of $10.3 billion in cross-border investments in the first six months of the year as opposed to the $6.9 billion that London received, according to data from the JLL. In the the same period of the previous year, London received $12.4 billion worth of investments as opposed to New York’s $11.3 billion in a report from JLL.
Most major cities have experienced an average 10 percent decline in cross-border investments after a stellar 2015 performance, which makes New York’s 8.9 percent decrease better than the industry average.
Since the financial crisis, the decline of investment inflows from 2015 to 2016 has been the largest and is partially due to concerns that the UK was coming to the end of its cycle even as pricing was reaching towards unsustainable levels.
Now, signs are showing that investors are growing nervous about the impact of the Brexit vote, Green-Morgan said.
Compared to the United States, the UK is viewed to be more investor-friendly for its beneficial tax-arrangements. Underlying property fundamentals showing strong demand and a weak supply should be in place to attract more capital that is now showing in the U.S. office and multifamily real estate sectors.
With the volatility caused by Brexit investors are more wary of investing in London, and to a lesser extent, Europe, said Ken McCarthy, senior managing director, regional research director for Tri-State New York at Cushman & Wakefield. In addition, negative interest rates experienced throughout the Eurozone are also sending investments toward the U.S.
“You’re going to see people look to redeploy their capital elsewhere and the big one will be the U.S.. Most likely given that it is overseas capital, it will focus on gateway cities,” McCarthy said, pointing to New York, Boston, Washington, Los Angeles and San Francisco.