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The world’s financial system is struggling to come to terms with the latest news, that there has been a major sell-off in British government-issued bonds, called gilts. Any drop in the market for bonds coincides with higher rates since the bonds have to offer more return in order to entice investors to look past their falling prices. Prices of these bonds have risen so much that with them come concerns that it might affect the country’s massive pension fund system.
The demand for UK bonds decreased thanks to a number of recent developments including currency devaluation and an unfavorable opinion of the new government’s plan to lower taxes and increase spending to aid citizens with energy costs. Demand for bonds is a proxy for the investment community’s outlook for the county’s economy. The United Kingdom has had a number of financial setbacks and a messy breakup with the European Union. With one of the most advanced economies, the UK will feel the pinch of a global recession more than most.
Investors that sell bonds in the UK are going to be looking to place that money elsewhere. This is where American real estate might come in. Bonds backed by American real estate, or mortgages for American real estate, might not be as secure as those built upon the economy of an entire country but they do offer a good option for investors in turbulent times. We all know the danger of mortgage-backed securities after the great recession (and a number of amazing movies depicting it) but much of that risk has been dialed back thanks to regulations passed since the financial crisis. Mortgages are held, serviced, and packed by companies that have more financial reserves than ever before.
The movement of capital from bonds to real estate has already been felt. Mortgage REITs like AGNC Investment, Annaly Capital Management, and Dynex Capital all saw a bump in yesterday’s trading after the end of the UK’s emergency bond buying program. America’s robust currency, stable economy, and valuable real estate are attractive options for capital. The exception to this theory, of course, is if the UK’s struggles drag down the global economy even further. After the American real estate market tanked the entire world economy in 2008, the contagion from a large scale financial collapse is all too real.
Friday is the day when the UK will stop buying bonds and we will learn the health of many of the country’s pension funds. As long as the system isn’t dysfunctional enough to drive the world into another financial meltdown, the struggles that the UK is having in raising debt might benefit the American real estate market. The Fed has been doing whatever it can to slow down the country’s overheating economy, but so far it has not been working as hoped. There are plenty of financial troubles on the horizon for the U.S. but right now it seems healthier than that of its Anglo ally across the pond.
Here is a great visualization of the size of all of the (known) wealth in the world and a great reminder of just how big the size of the derivatives market is.
American politicians have plans to bring manufacturing back home. If these pan out there are major implications for industrial real estate in the country.
Flipping houses has been good business for the last few decades as home prices continued to soar, but now some flippers are caught in a softening market and trying to limit their losses. (Bloomberg)
The struggles of traditional offices has created more demand for flexible office options and co-working for organizations of all sizes. (Fast Company)
As energy reduction laws for buildings start to take effect some environmental groups are lobbying to limit the amount of energy credits that landlords can purchase so they are forced to make energy reduction upgrades. (Politico)