Bank warns commercial property threatens stability

Bank warns commercial property threatens stability

Financial stability in the UK is still under threat from potential shifts in the commercial real estate sector, the Bank of England has warned.

The commercial property sector plunged after the European Union referendum as a surge of investors rushed to cash-in their investments, forcing a number of large real estate funds to suspend trading.

Some funds also sold assets at a significant discount compared to their valuations before the referendum on 23 June in order to raise cash and meet redemptions quickly. 

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The sector has undergone a significant slowdown after the Brexit vote, with the value of transactions sagging by 10 per cent in the third quarter of 2016, making it 27 per cent lower than a year ago. 

Yet through September and October, there had been signs of recovery in the commercial property market, and most suspended open-ended funds had either re-opened or announced their intention to do so by the end of this year. 

Despite this, the central bank’s Financial Policy Committee has agreed there is the risk of further adjustment in the sector.

The Bank of England warned valuations in some segments of the market continued to appear stretched, which could create “financial stability risks”.

The committee said another adjustment in the sector could result in a tightening of credit conditions, largely by limiting companies’ ability to use commercial property as collateral to access finance. 

According to a Bank of England 2015 review of bank lending to small and medium-sized companies, three-quarters of companies which had borrowed from banks had used commercial property as collateral.

Scott Gallacher, chartered financial planner at Rowley Turton, said: "I think the risks are overblown.

"While foreign capital is obviously important to London and the South East, outside of this bubble, property prices in the rest of the UK have remained constrained.

"I agree that valuations in London and the South East might be stretched but this will be offset to some extent to foreign investors due to the currency falls post-Brexit."