HFF Research Update for June 24, 2016: The Clash

Friday, June 24, 2016

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website.

“It's always tease tease tease

You're happy when I'm on my knees

One day is fine and next is black

So if you want me off your back

Well come on an' let me know

Should I Stay or should I go?

This indecision's buggin' me

If you don't want me, set me free

Exactly whom I'm supposed to be

Don't you know which clothes even fit me?

Come on and let me know

Should I stay or should I go?”

Thirty-four years ago this month, English punk group The Clash released their only number one hit “Should I Stay or Should I Go?”. If the singer assumed the position of the European Union, he now has his answer. No longer “teasing” Britons and the Welsh have roundly elected to “Leave” the European Union. As of this writing, the British Pound Sterling has lost nearly 8 percent of its value relative to the USD. David Cameron has tendered his resignation as Prime Minister and is currently at Buckingham Palace enjoying his last private audience with Her Majesty Queen Elizabeth II.

A lot has changed in the past 36 hours. The image of Cameron in front of the iconic architecture of No. 10 Downing Street delivering his resignation address already evokes nostalgia for an even-tempered leader making every effort to hold the status quo together.

But nationalism prevails, and the breadth of change has been arresting. Adding to the immediacy of political tumult, a vote of no confidence will be tabled against Labour Party leader Jeremy Corbyn when Ministers of Parliament convene in Westminster on Monday. Therefore, the United Kingdom will be negotiating an exit from the European Union at a time when leadership in two of its largest political parties is under contest.

Meanwhile, the plot is thickening. As we mentioned in a Rates Memo two weeks ago, this was possible, if not likely. The “Referendum Neverendum” continues, with the First Minister of Scotland Nicola Sturgeon announcing a second referendum for independence in that country is “highly likely.” Why? It is very difficult for Scotland to balance its budgets without assistance from the European Union – that is unless the price of oil is significantly higher than current prices. For this reason, Scotland voted overwhelmingly to “Remain” in the European Union alongside Northern Ireland.

Speaking of geographic divergence in polling results, the map looks quite similar to the red and blue of America in prior presidential elections. Watching the results late last night, the rural and therefore more obscurely-named areas poured into the blue, which in this case is "Leave". 

Larger metropolitan areas voted along liberal/social party lines (London, Leeds, Bristol, Liverpool, Manchester) while rural areas voted more conservatively (Bolsover, Castle Point, East Lindsey, Great Yarmouth, Kingston-upon-Hull, North East Lincolnshire).

On to the markets…

In an effort to calm markets nerves, Mark Carney made a podium address from his Bank of England where he serves as its Governor. Pointing to the increased capital requirements put upon banks by regulators, Carney also announced the intention to utilize 250 million GBP in liquidity to banks to normalize any instability. Meanwhile, European bank shares are experiencing quite a pinch. Earlier this morning, the FTSE 100 had contracted roughly 4.30% (the equivalent of the Dow Jones losing 770 points in a number of hours). But banks are far worse off thanks to lower forecasts for economic growth and the prevalence of general uncertainty.

European Bank Share Pricing Performance as of 7:30am EST.

Futures and Fair Value estimates imply a decline of more than 500 points when the equity markets open here in the U.S. this morning. Bond markets are of course open overnight and the yield on the 10-year UST has cratered, down 22 basis points to 1.53%.

To be sure, this volatility will eventually settle. Nationalism’s victory in the United Kingdom this week will surely embolden those in other regions of the world espousing the same mantra, namely here in the presidential election. As I have written in the past, rising nationalism is a threat to smooth foreign capital flows, which can significantly disrupt asset valuation so we need to be very mindful of that phenomenon.

And what of Brexit’s impact on U.S. commercial real estate? I have to leave it to an England-based economic think tank, Oxford Economics. Their analysis, which supposes little real impact here, is attached.

“If I go there will be trouble

And if I stay it will be double.”

If there is any silver lining, it is in the "Leave" effort prevailing right away. Had the results effected a narrow “Remain” victory, it is likely the Independence parties would have made every effort to carry out another referendum. Sometimes the best result is the swiftest.


About Jimmy Hinton

Mr. Hinton serves as managing director of HFF and is responsible for the firm’s national research efforts. Mr. Hinton works with the executive management team, assisting in investor relations and providing both HFF employees and firm clients with in-depth analysis of economic, property and capital market trends. Additionally, he provides extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton works with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

During his tenure at HFF, Mr. Hinton has supported the execution of more than 150 commercial real estate transactions totaling more than $4.5 billion in 20 states. Mr. Hinton has experience in fixed- and adjustable-rate debt, mezzanine debt, construction loans and joint venture executions on behalf of clients engaged in the acquisition, development and recapitalization of property types including multi-housing, industrial, office, retail, medical office and storage properties.

Sources: The Telegraph, Financial Times, The Guardian, Bloomberg, Daily Mail, Oxford Economics

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