The suspension of trading in large UK Property Funds could cause difficulties in the wider economy as businesses struggle to access finance, the Financial Policy Committee has warned.
The suspension of trading in large UK Property Funds could causedifficulties in the wider economy as businesses struggle to access finance, the Financial Policy Committee has warned.
In the FPC's Financial Stability Report for July it warned that the an amplified adjustment in the commercial real estatemarket could affecteconomic activity through the widespread use of CRE ascollateral for corporate borrowing.
According to aBank of England review of bank lending to small andmedium-sized companies, 75% of those UK companies thatborrow from banks use CRE as collateral.
So far Standard Life, Aviva for Investors and M&G have all suspended trading on their funds.
The FPC's report said: "In an upswing, when prices are rising, companies should beable to secure more, or cheaper, credit against theircommercial property.
"In a downswing, companies may beunable either to refinance existing debt or to borrow to investin new productive opportunities — a tightening in conditionsthat might be particularly acute if prices fall belowfundamental values."
Research by Bank staff suggests thatevery 10% fall in UK CRE prices is associated with a 1% declinein economy-wide investment.
The FPC added "The FPC is focused on the potential for adjustments in theCRE market to be amplified and affect economic activity byreducing the ability of companies that use CRE as collateral toaccess finance. Any adjustment could potentially be amplifiedby the behaviour of leveraged investors and investors inopen-ended funds.
"The Bank’s 2016 stress test will assessmajor UK banks’ resilience to a severe decline in CRE prices."
