The Bank of England labelled UK commercial real estate a major threat to the country’s financial stability this week but claimed banks were now less at risk from the sector’s volatility.
Among the risks the Bank listed in its Financial Stability Report and Stress Test was a continuing price correction in commercial property, as prices fell by 2.6% after the 23 June referendum.
With 75% of SMEs using commercial real estate as collateral, sharp price falls would affect their ability to borrow money, which could cause a downturn in the real economy, the report said.
But because banks have been de-risking and deleveraging their portfolios, the stress test showed that if there was a downturn prompting defaults that mirrored the 2008 financial crisis, less than 4% of UK banks’ commercial real estate loan books would see LTVs of 100% or more. That figure was 15% after the financial crisis.
Peter Cosmetatos, chief executive of CREFC Europe, said: “Commercial property is a sector that needs to be watched from a financial stability point of view.”
He added: “But it is not a scary environment. The Bank of England is right to say that this doesn’t look like a particularly vulnerable part of the system at the moment.”
• To send feedback, e-mail karl.tomusk@estatesgazette.com or tweet @ktomusk or @estatesgazette
