BoE keeping an eye on commercial property
The Bank of England has indicated today that it is keeping a close eye on the UK commercial property market and watching for signs that banks are becoming less prepared to accommodate borrowers’ difficulties in repaying debt.
In the BoE’s latest Financial Stability Report, which aims to identify key risks to UK financial stability, the bank has warned that commercial real estate companies are particularly indebted relative to their turnover, compared with other sectors of UK business, It also notes that there are recent signs of faltering demand for commercial property.
While commercial property values in the UK have risen by around 10% over the past six months, partly reflecting strong inflows into commercial property funds, the bank has noted that recent demand for UK investment in commercial property “has been focused on prime properties, with reportedly little appetite for lower-quality investments.”
Looking at the market for UK commercial property in general, the bank notes that values remain more than a third below the peak of June 2007, and “market contacts suggest that LTV ratios for many UK commercial property companies are significantly above levels at which banks would usually be willing to extend further credit.”
If banks become less willing or able to put up with borrowers breaching the covenants on their debt, this could lead to an increase in corporate liquidations, a greater supply of foreclosed property – and in turn a renewed fall in prices.
