The Bank of England says the prospect of open-ended funds being forced to sell assets is a risk to the UK’s financial stability.
Standard Life suspended trading on its £2.7bn real estate fund yesterday following withdrawals after the UK voted to leave the European Union. Aviva Investors followed suit on its £1.8bn property fund today. Others are monitoring redemption requests.
The Bank of England’s financial stability report, released today, said that if the market kept getting worse commercial, real estate companies that use debt to buy property may not be able to access that money.
It said: “Any adjustment in commercial real estate markets could potentially be amplified by the behaviour of leveraged investors and investors in open-ended commercial property funds.
“Although they have a range of measures to manage stressed levels of redemptions, these open-ended funds could be forced to sell illiquid assets to meet redemptions if conditions persist beyond funds’ notice periods.”
The Financial Conduct Authority chief executive Andrew Bailey said: “We are in very close touch with firms in real estate sector. My own feeling is that we will need to review structure of open-ended real estate funds.”
The bank also warned that such forced sales or lessening of values could impact the ability of property companies to lend money. “Any such amplification of market adjustments could affect economic activity by reducing the ability of companies that use commercial real estate as collateral to access finance.”
Since the Brexit vote, lenders have become concerned that their lending will become more restricted if their activities are deemed to become more risky.
The Bank of England in 2014 stress tested banks against a scenario that included falls in commercial and residential property prices of around 30% and 35% respectively, as well as abrupt slowing of capital flows, a fall in sterling of 30%.
The report also said UK property had experienced strong inflows of overseas capital, with foreign investors accounting for around 45% of total transactions since 2009. Foreign investments fell by almost 50% in the first quarter of 2016.
Valuations in some parts of the market, particularly prime London, had become stretched it found.
The report also noted the post-Brexit crash in share prices for REITs, which it said reflected the risk of prices dropping.
Bank of England governor Mark Carney said however that the UK banks’ exposure to commercial property was “quite manageable”.
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