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Bank of England report reveals post-Brexit foreign investment concern

Published 03/10/2016

The Bank of England has warned that the commercial property market is at risk of a
The Bank of England has warned that the commercial property market is at risk of a "sharp adjustment"

The Bank of England has warned that the commercial property market is at risk of a "sharp adjustment" and foreign investment is on the wane in the wake of Britain's decision to quit the European Union.

Minutes from the Bank's Financial Policy Committee (FPC) meeting on September 20 show that the number of FTSE 100 shares bought by foreign investors over the summer was less than half of what was observed last year, according to estimates by S&P Global Market Intelligence.

The FPC said this could have knock on effects for the broader economy.

It said: "Given the elevated level of uncertainty around the economic outlook, the risk remained of a fall in overseas investors' appetite to invest in the United Kingdom and consequently tighter funding conditions for the UK real economy."

In addition, the minutes noted that commercial real estate transactions slowed by 60% in July and August compared to the same period last year, dropping to their lowest level since 2009. That is as commercial real estate values dropped by 2.8% in July, and by a further 0.7% in August.

The FPC remarked that that prospects for the sector have weakened, with external forecasters expecting an average 10% drop in prices by the end of 2017.

"Overall, the FPC judged that the risks of a sharp adjustment in the UK CRE (commercial real estate) market were crystallising," it said.

There are concerns that a revaluation would have ripples across the economy.

"Such an adjustment could result in a tightening of credit conditions, and affect economic activity, by reducing the ability of companies that use CRE as collateral to access finance."

Major UK banks have so far proven "resilient" in the face of property market pressures, based on recent stress tests, the FPC said, adding that the 2016 stress tests were still ongoing.

However, according to a Bank review in 2015, about 75% of small and medium-sized companies used commercial real estate as collateral when borrowing from UK banks.

Meanwhile, overseas interest in UK assets appears to be waning in the wake of the Brexit vote.

While the FPC said there is no evidence of a large-scale reversal in capital flows, "there had been some signs of a reduction in foreign investor appetite for some types of UK assets".

For example, gross foreign investment into commercial real estate assets across July and August was less than a third of the average level of investment in 2015.

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