Commercial Real Estate: A Threat to Financial Security
20 December 2016 by Jordan-Ray Bennis
It is no secret that commercial real estate (CRE) was hit particularly hard by the UK’s decision to leave Europe, values fell and trading was suspended on many of the nation’s largest property funds in a bid to protect investors and limit outflows.
Reuters suggest that the market has shown ‘unexpected resilience’ to the vote, citing an overall rise in commercial real estate values for two consecutive months. Following October’s 0.067 percent increase, the MSCI IPD index reveals that property prices rose a further 0.34 percent last month.
Despite signs of market recovery however, the Bank of England has advised that ‘future adjustments’ in the commercial real estate sector could threaten the stability of the UK’s financial system. The slowdown experienced in the months leading up to the referendum has continued, with the value of transactions for Q3 falling by 10 percent on Q2 and 27 percent on the previous year.
The warning comes following the publication of the minutes of the Financial Policy Committee’s (FPC) latest meeting, which attributes the slowdown to ‘reduced foreign investor appetite for CRE and equities.’
According to the FCP, “[t]his could create financial stability risks, given the reliance of the market in recent years on inflows of foreign capital, and given that valuations in some segments of the market continued to appear stretched.”
It added that “an adjustment could result in a tightening of credit conditions by reducing the ability of companies that use [commercial real estate] as collateral to access finance.” According to a Bank of England report on lending to small-medium sized businesses in 2015, 75 percent of borrowing companies used commercial property as collateral.
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