British property panic a red flag for banks, insurers

Banks and building societies in the United Kingdom had around £90 billion (S$157 billion) in credit extended to domestic commercial real estate at the end of last year, said a study by De Montfort University. German, other international and US banks
Banks and building societies in the United Kingdom had around £90 billion (S$157 billion) in credit extended to domestic commercial real estate at the end of last year, said a study by De Montfort University. German, other international and US banks had £55 billion of exposure, having increased their investments in the sector since the 2008 financial crisis. PHOTO: BLOOMBERG

They could be hit if investment slows down, hurting demand for offices, shopping centres

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.

Banks and building societies in the UK had around £90 billion (S$157 billion) in credit extended to domestic commercial real estate at the end of last year, said a study by De Montfort University.

German, other international and US banks had £55 billion 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.

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 centres, as expected.

"There is a lot of uncertainty at the moment," said Ms Sonja Knorr, a funds analyst in Germany at rating agency Scope. "Transactions in the UK have come to a halt."

The total value of British outstanding commercial real estate debt stood at £183.3 billion as at Dec 31 last year, the De Montfort study said.

The uncertainty has already caused panic among some commercial property investors. In the past week or so, more than £18 billion of investor cash in commercial property has been frozen as funds run by M&G Investments, Standard Life Investments and Threadneedle Investments, among others, 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 United Kingdom property funds on Thursday to discourage withdrawals.

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

While UK banks' exposure to the sector is high, accounting for 45 per cent of lending last year, according to the De Montfort Commercial Property Lending Report, it is down from over two thirds a decade ago.

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

Meanwhile, German banks had more than £18 billion of outstanding loans in British real estate, compared to £10.5 billion of US 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 per cent fall in the value of sterling makes investments in Britain interesting, despite the Brexit. That goes for UK property as well, an area we are now looking at,"said Mr Andreas Gruber, chief investment officer of German insurer Allianz, responsible for investments of €640 billion (S$958 billion). "The lower value of the currency offers an attractive discount."

REUTERS

A version of this article appeared in the print edition of The Straits Times on July 09, 2016, with the headline 'British property panic a red flag for banks, insurers'. Print Edition | Subscribe