The United Kingdom’s Brexit from the European Union is a “canary-dying-in-the-coal-mine” warning of disaster for commercial real-estate winners in the globalist economy, just as the Lehman Brothers’ 2008 bankruptcy was a dramatic warning of disastrous losses in middle-class manufacturing jobs.
Domestic production and jobs have increasingly outsourced to the developing world, as “globalism” became the dominant U.S. and E.U. economic strategy over the last two decades. This caused leaders to push down nation’s interest rates to offset lower domestic capital investment, wages and consumption. But those lower rates greatly also amplified income inequality by driving-up the value of commercial real-estate rents and assets.
Rather than employing the standard response of lowering tax rates and reducing regulations on businesses and individuals, the United States led the European Union to raise tax rates on businesses and individuals while radically increasing environmental regulations to supposedly fight global warming.
Stimulating Western economies was left to the U.S. Federal Reserve and the European Central Bank, which slashed interest rates to all time lows levels.
More regulations and taxes just raised the cost of production in Western nations during a recession, which ensured the outsourcing of manufacturing jobs was more financially compelling. By the end of 2012, American manufacturing multinationals were employing two fifths of their workforce outside the States. The level of outsourcing of manufacturing jobs by US multinational corporations stood at about 50 percent by May 2016, when the Federal Reserve disclosed that ‘US Factory Orders’ had declined for the 19th month in a row.
The top 5 percent of U.S. Households have benefited from globalism since 2008 as their inflation adjusted incomes jumped 13 percent to $332,347. But the middle 20 percent of households’ incomes inch-up by just 3.5 percent to $54,041. This rise of inequality, means that U.S. middle bracket households now have only one sixth the income of the top tier.
The E.U. multinational corporate offshoring surge started a few years after the Americans, but a 2012 study by London’s Civitas’ Institute for the Study of Civil Society found:
Over a fifth of manufacturers had offshored production to replace U.K. capacity and another fifth were planning to do so in the future. Over half were going to create offshore plants to increase their capacity and two-thirds also claimed to have outsourced some component manufacturing abroad, with a further fifth planning likewise.
Just like the U.S., globalism’s outsourcing evicted millions of U.K. blue collar workers from the middle class.
But the U.K. rich also got richer as heavy investors in commercial real estate trusts. Since 2008 to 2015, the demand for white-collar commercial space in London jumped by 40 percent, while regulatory compliance costs shrank the availability of commercial space by 40 percent, according to the Royal Institute of Chartered Surveyors. U.K. commercial real-estate trust values rose by 28 percent and paid 3 percent annual dividends during the period.
But as the Brexit vote neared, the Royal Institute warned that concerns about, “Britain’s future position in Europe were weighing on investment.”
Although the June 23 Brexit passage was celebrated by what is left of the British middle class as a triumph over globalism, wealthy U.K. commercial real-estate trust investors are in panic-selling-mode as buyers have evaporated.
Since June 24, the management of seven U.K. property trust funds supposedly worth $35 billion have been hit so hard with cash-out demands, they were forced to suspend redemptions. Only fund manager Aberdeen has published a “guestimate” that the Brexit passage’s 2016 impact is a 30 percent loss in value for their commercial real-estate trust holdings.
After a short economic contraction, the Brexit’s rejection of globalism will be good for U.K. economic growth, jobs and wages by 2017. But the Brits’ rejection of globalism’s “financialization of economies” is an existential threat to international real estate values.