British property panic a red flag for banks, insurers

Workers stand on scaffolding on a new residential building at Battersea in London, Britain, March 7, 2016. REUTERS/Toby Melville

FRANKFURT/ LONDON: The run on British property funds has drawn attention to the vulnerability of the commercial real estate sector, largely funded by domestic banks and building societies but increasingly by foreign banks and insurers. U.K. banks and building societies had around 90 billion pounds ($117 billion) in credit extended to domestic commercial real estate at the end of 2015, according to a study by De Montfort University.

German, international and U.S. banks had 55 billion pounds of exposure, having increased their investments in the sector since the 2008 financial crisis. Insurers, which prior to the crisis had barely any exposure accounted for 25.9 billion pounds.

This means they could all take a hit if Britain’s vote to leave the European Union leads to a slowdown in business investment and depresses demand for offices and shopping centers, as expected.

“There is a lot of uncertainty at the moment,” said Sonja Knorr, a funds analyst at rating agency Scope.

“Transactions in the U.K. have come to a halt.”

The total value of U.K. outstanding commercial real estate debt, stood at 183.3 billion pounds as at Dec. 31, 2015, the De Montfort study said.

The uncertainty has already caused panic among some commercial property investors. In the past week, more than 18 billion pounds of investor cash in commercial property has been frozen as funds run by M&G Investments, Standard Life Investments and Threadneedle Investments suspended trading.

While ordinary retail investors stand to lose most initially, some funds have been paring back the value they put on their property – a signal that a price drop is likely. That would hit the banks that lent or insurers invested in property.

Legal & General’s fund arm and F&C Investments both cut the value of their U.K. property funds Thursday to discourage withdrawals.

“Property is so much about confidence,” said Danny Cox of broker Hargreaves Lansdown. “Once you have this kind of dent, it will take a time to come back.”

While U.K. banks’ exposure to the sector is high, accounting for 45 percent of lending last year, according to the De Montfort Commercial Property Lending Report, it is down from over two-thirds a decade ago.

U.K. banks’ loans to the sector have declined every year since 2009, according to Bernstein Research, only returning to slight growth in March this year.

Meanwhile, German banks had over 18 billion pounds of outstanding loans in British real estate compared to 10.5 billion of U.S. peers at the end of last year, De Montfort said.

For some foreign lenders, commercial property may still be an attractive proposition because of the fall in the value of the pound.

“A 17-percent fall in the value of sterling makes investments in Britain interesting, despite the Brexit. That goes for U.K. property as well, an area we are now looking at,” said Andreas Gruber, chief investment officer of German insurer Allianz, responsible for investments of 640 billion euros.

“The lower value of the currency offers an attractive discount.”

A version of this article appeared in the print edition of The Daily Star on July 09, 2016, on page 5.




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