The UK’s commercial real estate sector remains at risk of further losses according to the Bank of England (BoE), as the vote to leave the European Union continues to leave its mark.
The BoE’s Financial Policy Committee (FPC) said “there was the risk of further adjustment in the sector” which could create knock-on risks for the UK’s financial system – particularly if foreign investors withdraw from Britain – according to minutes of the FPC’s meeting.
Valuations for some parts of the sector appear “stretched”, said the BoE, while the “reliance of the market in recent years on inflows of foreign capital” could exacerbate the risk to the UK’s broader financial system. Investments by foreign owners are particularly vulnerable to fluctuations in the exchange rate, which has so far been the most visible economic effect of the Brexit vote.
Commercial property activity “slowed sharply” following the referendum said the bank, as third-quarter transactions fell by 27 per cent compared with the period last year.
That slowdown put pressure on open-ended funds as they struggled to redeem property investments – which are by their nature illiquid. This illiquidity makes the sector more vulnerable to rapid tightening in credit conditions.
Another financial crisis could weaken companies’ ability to access credit if the property used as collateral for loans falls in value, according to the BoE.
The warning comes after the publication of the BoE’s Financial Stability Report last week. The FPC warned in the report that rental yields remained low in London in particular, although it noted that the correlation with UK bond yields did not point to an increased market perception of risk in the sector.