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.
In the FPC’s Financial Stability Report for July it warned that the an amplified adjustment in the commercial real estate market could affect economic activity through the widespread use of CRE as collateral for corporate borrowing.
According to a Bank of England review of bank lending to small and medium-sized companies, 75% of those UK companies that borrow 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 be able to secure more, or cheaper, credit against their commercial property.
“In a downswing, companies may be unable either to refinance existing debt or to borrow to invest in new productive opportunities — a tightening in conditions that might be particularly acute if prices fall below fundamental values.”
Research by Bank staff suggests that every 10% fall in UK CRE prices is associated with a 1% decline in economy-wide investment.
The FPC added “The FPC is focused on the potential for adjustments in the CRE market to be amplified and affect economic activity by reducing the ability of companies that use CRE as collateral to access finance. Any adjustment could potentially be amplified by the behaviour of leveraged investors and investors in open-ended funds.
“The Bank’s 2016 stress test will assess major UK banks’ resilience to a severe decline in CRE prices.”