Brexit’s ‘New Normal’: A Veteran Investor’s Insights

Ronald Dickerman of Madison International Realty sheds light on how the U.K.’s departure from the European Union will play out on both sides of the Atlantic.
Ron Dickerman, Madison International Realty
Ronald Dickerman, founder & president of Madison International Realty

New York— A longtime investor in the U.K., continental Europe and the U.S., Ronald Dickerman is in an ideal position to shed light on how the United Kingdom’s departure from the European Union will affect markets on both sides of the Atlantic. Madison International Realty, the firm he founded in 2002, specializes in capital partner replacement, equity monetization and recapitalization of Class A properties.

As CPE recently reported, this month the New York City-based firm announced the closing of a $1.39 billion fund, its largest to date.

At the time of last month’s stunning the United Kingdom’s stunning vote last month to leave the European Union, Dickerman was on a business trip to London. He recently discussed what the future holds in an in-depth conversation with CPE’s Alexandra Pacurar.

CPE: How do you think Brexit will affect U.S.-based investors’ strategies in the U.K. and  Europe?

Dickerman: I think U.S. investors are very much in a wait-see attitude in relation to London. Europe is still a destination of choice, but the broader question is, “What is Brexit and what does it look like?”

There are a lot of things that are not yet clear. What is clear is that the U.K. is going to leave the European Union, but what types of negotiations will take place over jobs, passporting, immigration, taxation and trade? Those issues are still very much to be resolved.

So, there was an initial shock that was felt when the Brexit vote took place. We were actually on the ground in London. We purposely went there to talk to management teams of both public and private real estate companies, and what was so fascinating is that no one really took the Brexit seriously.

Even though the polls were neck and neck, the general view was that it was sort of business as usual on that Thursday. For example, the U.S. stock market was up 200 points, the pound was $1.46. It was rising. And the bookmakers (gave Brexit) a 20 percent chance (to pass). But again, the polls were neck and neck, so it shouldn’t come as a shock or a surprise.

I think the general view in the U.S. is it was a bad decision. In a world where you’ve got these world trading blocs involved in China, the U.S. and the European Union, how is it possible that the U.K. can go at it alone and expect to be competitive? I think it was a political miscalculation and there is probably some view that it is a protest vote more than anything else.

CPE: What do you think will happen in the following months, by the end of the year?

Dickerman: A couple of things have to happen. First, I think there has to be some stabilization of the U.K. property markets. On Friday morning, after the vote, Land Securities—which is sort of the (flagship) public company, along with British Land and a few others—opened 30 percent down. And then, David Cameron gets on television and resigns.

So, there was a huge amount of volatility. Even today, the price of those public companies is down roughly 30 percent from the high. So, the question is … “Have London office buildings declined 30 percent in value since last week (before the vote)?” The answer is probably “no”, but the other part of it is one that no one really knows.

(So) the first thing that has to happen is an equilibrium has to be established. You probably read that three U.K. property funds suspended transfers for retail investors, which was pretty shocking.

The second thing is transactions have to resume, and there has to be a semblance of an orderly market. Only then will investor confidence come back into the marketplace. In Europe there is probably caution. I think there’s a little bit more confidence that investing in Europe will sort of continue as business as usual, but there’s a lot of caution and people sitting on the sidelines.

CPE: When do you think this equilibrium might be reached?

Dickerman: I think you’ll see a little bit of a pattern developing in three months. It will take about six months to establish a clearer pattern and, in my opinion, about a year to reach full equilibrium. The other thing that goes without saying is we’re going to be living under the cloud of Brexit for several years. You and I will wake up every morning reading about negotiations with the European Union, the latest twists and turns, how does it impact everything, and how are the markets going to react. This is the new normal for us. What is Brexit? What does it mean? This will create more volatility and more uncertainty.

CPE: Have investors changed their approach toward the European market because of Brexit?

Dickerman: I think they have become more cautious, probably focused more on quality and safety, looking to take little less risk.

CPE: Do you expect there will be any permanent changes to the market because of Brexit?

Dickerman: “Permanent” would suggest a long, long time, so it’s really hard to tell. I think that this is really a shame. The EU has been a big bonus for Europe in creating stability, keeping the peace, creating cohesiveness and a competitive trading environment. The risk is that other countries will become bold and feel like maybe they should leave the EU, which, personally, I think would be a mistake. I don’t know what the future holds precisely, but it is possible this is something that we live with for a long time.

When you think about the last couple of years with the bailout of Greece and the issues with Portugal, the fact of the matter is had that happened after Brexit, is it possible they would have booted Greece out of the EU, because they wouldn’t have been so focused on preserving the Union? It’s impossible to tell, but I think the landscape has shifted.

CPE: Do you think all this uncertainty will cause properties in London to decrease in value?

Dickerman: Over the short-term, yes. It absolutely has to. And I think that is part of the equilibrium I talked about before. There is no way London property can continue at the same valuation as it was the day before Brexit. There has to be some correction. As I mentioned, the public companies are down 30 percent. Am I suggesting private value will correct that much? No. But there has to be some adjustment.

CPE: What do you expect will happen in the U.S. real estate markets?

Dickerman: We think that for the U.S., the Brexit has benefited the real estate market. If you think of the stature of New York and London (as) the ultimate investment destinations for capital around the world, in terms of quality and safety. Now you have to take London off the list, at least for a while. So, the only thing left on the list is New York. That served us very well. We actually think that a lot of the public companies have moved in pricing for exactly (that) reason.

I think the U.S. capital markets are becoming a little bit more cautious, but on the other hand, I think that there’s a fair amount of liquidity. There’s a lot of capital to deploy.