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More Foreign Investment in the U.S. Real Estate

The turmoil roiling the United Kingdom real estate market since the surprise Brexit outcome is unlikely to trigger similar impact for the U.S. real estate sector, industry experts predict.

In fact, some predict U.K pain ultimately could mean U.S. gain.

The June 23 referendum in favor of breaking ties with the European Union has raised uncertainty about some U.K real estate prices. UBS analysts tentatively project commercial property values could fall 20% for London offices, 15% for U.K. retail and 5% to 10% for London retail and U.K. industrial locations.

The Brexit fallout also prompted a wave of redemption requests at U.K. property funds. Unable to sell properties immediately to raise cash, at least six of the funds blocked retail investors from withdrawing their money amid a wave of redemption requests.

The decisions represent a nearly one-month lock on an estimated $12 billion in U.K. commercial real estate investments.

“There’s no indication of anything like that happening in the U.S.,” said Jim Costello, senior vice president of Real Capital Analytics, a data firm focused on commercial real estate investment.

Instead, sovereign wealth funds and other large institutional funds that were drawn to London real estate investments may now shift some of that capital to properties in the U.S. market, said Costello.

“The fundamentals of U.S. real estate are positive,” said Cedrik Lachance, director of U.S. REIT research at Green Street Advisors, a California-based real estate research firm. “That seems unchanged to us.”

An average publicly traded U.S. real estate investment trust (REIT) has outperformed the Standard & Poor’s 500 index by approximately 2.5% since the Brexit vote, said Lachance. However a group of roughly 10 U.S. REITs with more exposure to Europe in general have underperformed their peers, he said.

As U.K. property investors reconsider their holdings, publicly traded U.S. REITs “could be one of the beneficiaries” in the long term, said Michael Grupe, of NAREIT (National Association of Real Estate Investment Trusts).

Investor uncertainty about the global economy, partly driven by the Brexit outcome, has driven down U.S. Treasury yields to record lows. In turn, that has sent mortgage rates toward record lows too. The 30-year fixed rate mortgage averaged 3.41% for the week ending July 7, down from the 3.48% average a week earlier and 4.04% lower than the average for the same time last year, mortgage giant Freddie Mac reported Thursday.

The lower rates “could provide a boost for lower-income U.S. buyers” hoping to enter the real estate market, said Lawrence Yun, chief economist for the National Association of Realtors.

Uncertainty over the London real estate market could prompt U.S. and overseas companies with offices in the British financial center to shift those offices to the U.S., further boosting the domestic real estate sector, said Yun.

Nonetheless, Yun and other U.S. real estate experts see a few potential weak areas.

National Association of Retail data show that U.K. buyers accounted for $1.6 billion in April 2015-March 2016 residential housing purchases in Florida, which has a large vacation home market. The post-Brexit decline of the British pound relative to the U.S. dollar could dry up similar sales for the immediate future, Yun said.

Investors have already battered the stocks of U.S.-based real estate services giants CBRE Group (CBG) and JLL (Jones Lang LaSalle) (JLL) amid the Brexit fallout. Both have significant U.K. business operations.

CBRE shares are down 12.7% since the referendum, part of a 24.2% year to date fall. The stock closed up 6.4% at $26.20 Friday. JLL shares have fallen 15.1% since Brexit and are down 37.6% year to date. The stock rose nearly 8.9% Friday to $99.70.