Brexit Opens Window for Canadian Commercial Real Estate

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Pierre Pequegnat of Mortgage Alliance Commercial comments on Canadian Commercial Real Estate following Brexit vote.

License No. 12020

Pierre Pequegnat is an Agent with Mortgage Alliance Commercial, licensed by the Financial Services Commission of Ontario. He is a contract Professor at Ryerson University (Toronto, Canada) for the Ted Rogers School of Management in Real Estate Finance.

Nations are experiencing market volatility and uncertainty as the world digests the short and long-term repercussions of Brexit. Other events impacting world trade flows include: the 2017 elections in France and Germany; China and Brazil’s slowing economies, and the US presidential election.

“As a result, political and economic contagion may keep investors off-balance while the EU’s trade deals with Canada, the US and Japan may become protracted and subordinated to more pressing Brexit matters,” says Pierre Pequegnat.

In the UK, “economists now expect the MPC [Monetary Policy Committee] to slash rates in the next six months with some forecasting that rates will be cut to zero amid a possible slowdown in economic growth.” (Camilla Canocchi, ThisisMoney.co.uk, June 24, Attribution 1).

Combined with the increased risk of a credit crunch (Martin Arnold, FT.COM, March 29, Attribution 2), capital experienced flights to quality and countries offering more stable investment returns. During the morning of June 24, investors moved capital to bonds, gold and US Treasuries.

So what does this mean for commercial real estate investors?

Commercial real estate trends are measured in years and decades. The ‘term’ nature of underlying lease contracts defines the cyclicality of real estate; but, from time-to-time, forces arise that structurally change real estate investment and trading values.

“As Brexit and economic concerns have heightened short and long-term uncertainty, investors are now more likely to maintain above average interest in North American markets relative to Asia, the EU, the UK and the Emerging Markets. Capital inflows are supporting the US dollar. This, in turn, helps support a low-interest rate environment,” says Pierre Pequegnat.

On June 15, the U.S. Federal Reserve announced it would keep rates unchanged at 0.5% in light of a Brexit possibility. “Britain's shock vote to leave the European Union may tie the U.S. Federal Reserve to near zero interest rates for far longer than expected, according to new research indicating the U.S. central bank is now tightly bound to international economic conditions.” (Howard Schneider, Reuters, June 24, Attribution 3). In Canada, Bank of Montreal’s Chief Economist, Doug Porter commented “…global interest rates are likely to remain even lower for even longer amid the deep uncertainty over the U.K.'s and the EU's economic fate…” (Babad, Michael, The Globe and Mail, June 16, Attribution 4).

“The Bank of Canada may follow the US and keep interest rates low. Foreign investors have an open window to buy Canadian commercial real estate and park mid- to long-term money with the added benefit of a low entry Canadian/US dollar exchange rate,” says Pierre Pequegnat.

As Brexit resolutions will take time and may slow economic growth, investors will continue to seek ‘alternate’ investments such as commercial real estate where less volatile, long-term returns are available from private equity companies and crowdfunding portals.

“Coupled with low interest rates, opportunities will arise for financially agile deal makers and investors who know how to properly analyze real estate opportunities based on lessee quality and community health factors such as customer traffic, localized spending trends and disposable consumer income," says Pierre Pequegnat. If global economies weaken, owners of Canadian commercial real estate need to vet underlying leases and in particular, leases directly or indirectly dependent on UK or EU trading partners. Along with economic weakness usually comes a degree of industry consolidation. Highly leveraged properties experience pressure to restructure, increase invested capital or sell.

“As a result, the Canadian commercial real estate market is about to be perceived internationally as ripe with opportunities, by capitalized investors seeking long-term returns and a foreign currency exchange play,” comments Pierre Pequegnat.

About Pierre Pequegnat
Pierre Pequegnat is a mortgage Agent with Mortgage Alliance Commercial. He is a contract Professor at Ryerson University for the Ted Rogers School of Management in Real Estate Finance for MBAs and in Entrepreneurship & Strategy for undergraduates. He has held corporate leadership positions at Butterfield Bank, Ernst & Young, Macquarie Financial, Scotiabank and William M. Mercer Limited. Pierre is licensed by the Financial Services Commission of Ontario (Licence No.: M-15001991) and holds an MBA from Schulich School of Business, York University and a BASc. in Mechanical Engineering from University of Toronto.

ppequegnat(at)macommercial(dot)ca | pierre(dot)pequegnat@cahorizons.com
http://www.cahorizons.com | http://www.macommercial.ca

Attributions:
1. Canocchi, Camilla. Interest Rates ‘will be cut towards zero by early 2017’ as Brexit prompts economists to slash UK growth forecasts. ThisisMONEY.co.uk, 24 June 2016, p. 1. http://www.thisismoney.co.uk/money/news/article-3658528/Interest-rates-cut-zero-early-2017-Brexit-prompts-economists-slash-UK-growth-forecasts.html
2. Arnold, Martin. Bank of England says Brexit carries risk of credit crunch. Financial Times, 29 March 2016, p. 1. https://next.ft.com/content/46c30d52-f596-11e5-96db-fc683b5e52db
3. Schneider, Howard. Brexit a knockout punch to Fed’s interest rate divergence mantra. Reuters, 24 June 2016, p. 1. http://www.reuters.com/article/us-britain-eu-fed-policy-analysis-idUSKCN0ZA39C
4. Babad, Michael. How Brexit could fan the ‘flames’ in Canada’s hot housing market. The Globe and Mail, 16 June 2016, p. 1. http://www.theglobeandmail.com/report-on-business/top-business-stories/how-brexit-could-fan-the-flames-in-canadas-hot-housing-markets/article30465885/

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