The Property Industry Alliance has called for a review of real estate financing ahead of the implementation of regulations, such as the controversial slotting regime.
In a report on UK commercial property debt risk, it warned that without sufficient oversight, new banking regulation could entrench market dysfunctions and lead to a build-up of new sources of systematic risk.
The PIA, which includes the Investment Property Forum and the Association of Real Estate Funds, found that “one regulatory size will not fit all”, given the huge structural changes underway in the real estate debt sector.
These changes include the diversification of the lending market as banks exit and a new shadow lending system from insurers and institutions emerges.
Co-chairman of the PIA Debt Group Phil Clarke said: “While it is clearly positive for the market to have new sources of debt available, the question is whether there is sufficient oversight of new entrants to have an entire market view.”
The Financial Services Authority’s overhaul of UK banks’ capital adequacy requirements, known as slotting, “stands out because its impact, while indirect, specifically and potentially inappropriately targets the real estate sector”.
The report said that before slotting was implemented, there should be a full impact assessment on the banking and real estate markets and economy as a whole, “to avoid a potentially unnecessary, but forseen, dramatic impact on the banking and real estate markets”.
A medium-term review should consider the desired spectrum of financing of the market and “could ensure a portfolio of adequately capitalised lender types, and embed a brake on lending as markets enter above trend valuation levels”, it said.
The PIA also suggested that the review looked at incentives and other factors which drive the property and lending market, particularly how real estate bubbles and lending bubbles are caused and fuelled.
Bridget.O’Connell@estatesgazette.com
