Banks at Risk From Post-Brexit Property Turbulence, BOE Says

  • Reliance on overseas capital makes system more vulnerable
  • Decline in values would limit borrowers access to finance

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Falling commercial real estate prices after the U.K.’s vote to leave the European Union pose a threat to bank stability because of the market’s reliance on foreign capital, Bank of England said.

Values have declined 2.6 percent since the referendum and may drop further from their current high levels, according to the central bank’s twice-yearly assessment. Continuing declines would affect companies’ access to finance because many use commercial real estate as collateral.

A decline in U.K. commercial-property values will accelerate in 2017, with parts of central London seeing a much sharper drop than the average of 10 percent to 15 percent, Deutsche Bank AG’s asset-management unit said in a report in September. Simon Wallace, head of alternative asset research at the unit, said the fall could reach 30 percent.

The value of U.K. commercial property transactions in the third quarter was 27 percent lower than the previous year, the BOE report said. There is now less liquidity in riskier parts of the market including new developments, the BOE said, citing industry contacts. While some segments of the market are stabilizing, prices of prime London offices are elevated compared to rents, posing a greater risk of correction.

Overseas investment, which has accounted for around half of U.K. commercial real estate transactions since 2012, has fallen sharply in 2016, the BOE said. While a decline in the value of the pound against the dollar may attract some foreign investors, the volatility in the exchange rate may deter others and damp demand for the properties, the report said.

Future price cuts could be amplified by open-ended property funds, several of which were suspended after the Brexit vote as investors rushed to redeem their holdings, the report said. While gating of the funds and stabilization of the property market prevented widespread fire sales, future shocks to the market could trigger similar cycles of redemptions, suspensions and discounted sales, the BOE said.

The central bank supports the Financial Conduct Authority’s plan to publish a discussion paper on the problems associated with daily-traded funds investing in illiquid assets including property, it said.

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