Brexit risks materialising, warns BOE

The Bank of England (BOE) stands, ahead of the bank's financial stability report news conference.
The Bank of England (BOE) stands, ahead of the bank's financial stability report news conference.PHOTO: BLOOMBERG

Investors rushing to pull money from UK commercial property

LONDON • The Bank of England (BOE) has warned that risks to financial stability are materialising after the shock Brexit vote, as three asset managers froze withdrawals from commercial real estate funds after investors rushed to redeem money amid growing concerns about the future of the British economy.

The central bank’s Financial Policy Committee (FPC) watchdog on Tuesday outlined various risks after Britons voted last month to leave the European Union.

Meanwhile, sterling yesterday plunged to a fresh 31-year low of below US$1.30 after BOE governor Mark Carney vowed the day before to take “whatever action is needed” to support stability.

And Britain’s first government bond launch since the June 23 EU referendum returned a record-low yield of 0.382 per cent.

“There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging,” the FPC, which oversees financial stability, said in its bi-annual report.

The BOE on Tuesday cut the banking sector’s capital buffer rate from 0.50 per cent to zero, where it will stay until at least next June 2017. The move will boost lending by up to £150 billion (S$264 billion) and reduce banks’ regulatory capital buffers by £5.7 billion. Also, Finance Minister George Osborne met Britain’s top banks to discuss increasing lending.

“The bank can be expected to take whatever action is needed to promote monetary and financial stability, and as a consequence, support the real economy,” Mr Carney said on Tuesday, adding that it has a “clear plan” to address heightened uncertainty in the markets. Carney had indicated last week that the BoE could cut its key interest rate to a new record-low level under 0.50 percent as early as this month while vow to pump at least £250 billion into money markets if needed to prevent a damaging credit crunch.

The FPC pinpointed Britain’s commercial real estate market, which it argued had “experienced particularly strong inflows of capital from overseas and where some valuations in some segments... had become overstretched”.

The value of office properties in central London could fall by up to 20 per cent after Britain leaves the EU as firms consider moving to Europe or delay expansion plans in the UK, industry observers say.

The news, combined with intensifying Brexit worries, prompted both Aviva Investors and M&G Investments to suspend trade in key property funds, mirroring a similar move by Standard Life on Monday.

“The UK’s most prominent open property funds stopping withdrawals to try to avoid fire-sale type of liquidations have put market attention on the 45 per cent foreign participation within those funds,” Morgan Stanley said in a note yesterday. “It underlined the significance” of sales of pound-denominated assets by overseas investors.

Henderson Group, Aberdeen Asset Management and Schroders have higher exposure to real estate compared with their peers, according to Morgan Stanley, while Royal Bank of Scotland and Lloyds Banking are the two major UK lenders most exposed to the commercial real estate market, JPMorgan Chase & Co said.

Investors from Asia accounted for 12 per cent of the £10.7 billion of direct real estate investment in the UK in the first quarter, making them the largest international group, according to Jones Lang LaSalle. The country has been among the top five global real estate investment destinations for decades, especially for buyers from Singapore, China and Hong Kong.

AGENCE FRANCE-PRESSE, BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on July 07, 2016, with the headline 'Brexit risks materialising, warns BOE'. Print Edition | Subscribe