Brexit Could Be a Good Thing for These US Real Estate Investment Trusts

We still don't know exactly what the long-term impact of last month's Brexit vote on U.K. real estate will be. One thing is likely in the near term, though. Britons' decision to leave the European Union is likely to cause investors to pull money out of U.K. real estate. If they do, there's a good chance they'll choose to invest across the pond, and this could have a significant impact on U.S. real estate investment trusts such as AvalonBay Communities (AVB)  and Equity Residential (EQR) .

Many industry professionals are convinced U.K. real estate prices will drop. Some think that's a good thing.

"Developers and estate agents have already developed the new marketing pitch," said Bernie Morris, president of U.K., Europe and Middle East for Juwai.com, a large Chinese international property portal. "They point to Brexit as an opportunity for offshore buyers to snap up properties at bargain prices."

Others, however, remain less optimistic about the recent event in the U.K.; they can't help but place the latest news in historical context.

"The most likely scenario is one that we have seen before in other times of dislocation -- 1987, 1998 and 2008 -- a period where the market seizes up and the only activity is between the brave and the desperate," said Charlie Ellingworth, company director at U.K. buying agent Property Vision. "That period will end, but the summer will be long and difficult until the uncertainty passes."

KC Sanjay, an economist at Axiometrics, recently wrote that the U.K. decision to leave the European Union "could decrease the value of British real estate, at least in the short term, as the United Kingdom attempts to first negotiate its way out of the EU, then seeks new trade deals on its own."

Falling prices could lead real estate investors who were active in the U.K. to look elsewhere for rising markets. Some may set their sights on the U.S. And one sector here that is simply too good for them to ignore is REITs, which are firing on all cylinders right now.

REITs have already outpaced the broader equity markets for the better part of 2016, and experts believe their future prospects are even brighter, given that real estate will be elevated to the sector level in the S&P indices in September.

It didn't take the Brexit vote for U.K. investors to take notice of the positive trends for U.S. real estate. According to Real Capital Analytics, Great Britain accounted for the second largest concentration of foreign investments in U.S. multifamily real estate last year, second only to Canada (although Canada was ahead by a wide margin).

But 2016 may be the year British investors gain some ground on their Canadian counterparts in investments in multifamily REITs. That's because a Brexit-related lull in British real estate could very easily convince them to invest more heavily in U.S. REITs.

U.S. real estate provides better returns and appreciation rates. But tax incentives were recently put into place to make -- you guessed it -- REITs more attractive to foreign investors. In an attempt to attract foreign investors, the U.S. government eased the tax burden they would face on respective deals. According to KC Sanjay, "a non-U.S. investor can now own up to 10% of a REIT before incurring federal taxes -- up from 5%."

So not only are U.S. REITs expected to outpace the British real estate market, but they have the added advantaged of a minimal tax burden.

The question, however, isn't whether or not British capital will flow into U.S. REITs, but rather which of those real estate trusts will benefit the most? If the trends witnessed last year tell us anything, it is that REITs investing in multifamily and apartments are a good bet.

Look for REITs such as the aforementioned AvalonBay Communities and Equity Residential to be among the first to benefit from a potential influx of investor capital. Already in high demand, these companies are heavily invested in apartment buildings and appear ready to take advantage of the new household formation on the horizon.

For what it's worth, new household formation is the highest it has been in nearly a decade, and most of those families are looking to rent rather than buy. It just so happens that AvalonBay Communities and Equity Residential have positioned themselves in a great place to take advantage of the impending renter pool. British investors that have noticed the trend may look to these companies first, and you may want to as well. At the very least, now is perhaps one of the best times to be a landlord in recent history, and you can bet foreign investors want a piece of the action.

Both AvalonBay Communities and Equity Residential have proven they belong among the ranks of exciting REITs this summer. Each has managed to increase its dividend payouts by as much as 50% in the last five years, which translates roughly into a 3% payout in today's market. As a result, both companies have seen funds from operations (FFO) benefit from an encouraging jump, further proving they are capable of providing sound fundamentals for the foreseeable future.

If multifamily and apartment REITs aren't your speed, you may want to consider Federal Realty Investment Trust  (FRT) . Already a proven leader in the ownership, operation and redevelopment of premium retail properties, Federal Realty Investment Trust looks to ride the wave of today's successful REITs. In developing and renting out retail space, look for Federal Realty Investment Trust to be a good bet to receive some of the British capital that could make its way overseas. Currently yielding approximately 2.4%, shares of Federal Realty Investment Trust have increased 86% in the last five years.

Only two weeks later, we still have to see just how the Brexit vote will play out in the U.K., however British investors are more than aware of how attractive U.S. real estate is at the moment. In the event their real estate market stagnates or drops in price, there is a good chance REITs stateside will benefit immensely. That said, if the Brexit vote has little to no impact on British real estate, REITs are still in a position to yield attractive returns this summer.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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