Jul 5, 2016 1:24 PM
Investors rush to sell out of UK commercial property
The Associated Press
LONDON (AP) — The British pound dropped sharply to a new 31-year low on Tuesday amid concerns that the country's decision to leave the European Union might cause a steep slide in U.K. commercial real estate values and hurt the wider economy.
Markets were jittery after three financial firms stopped trading in their respective U.K. commercial property funds following a rapid increase in investors trying to sell their holdings. The funds buy commercial property and offer shares to investors.
Some of those investors now appear worried that companies might opt to leave London to move operations to mainland Europe to retain access to the EU market. That would vacate office space and weigh down on real estate values in Britain's capital.
Aviva Investors, Standard Life and M&G Investments said they froze the funds to protect other investors who wished to remain in the funds.
"Redemptions have now reached a point where M&G believes it can best protect the interests of the funds' shareholders by seeking a temporary suspension in trading," the company said of the 4.4 billion pound ($5.8 billion) fund.
The moves come even as the Bank of England moved to reassure markets it would avoid a repeat of the 2007-08 financial crisis, freeing up more money for loans to business and households. Drawing another line under another dramatic day, a group of senior bank leaders — including the chairmen of Barclays, Royal Bank of Scotland and HSBC — met with Treasury chief George Osborne and promised to keep money flowing into the system.
"We have a clear plan. We're putting measures in place," Carney said. "And it's working."
In a time of political upheaval, Carney offered the counterpoint of confidence and control, announcing changes to the amount of rainy-day funds banks have to hold. That, he hopes, will help the banks lend as much as 150 billion pounds ($199 billion) more, supporting the economy during the uncertainty surrounding the exit from the single EU market of some 500 million.
Carney, however, was direct in explaining that some of the risks to the economy predicted before the referendum had in fact begun to crystalize.
Among them was the concern about the skyscrapers, shopping centers and other big buildings that have come to epitomize London's growth as a financial powerhouse. The Bank of England had cited the commercial real estate market as one of the risks to the British economy, saying the sector has taken in capital from overseas and had become "stretched."
The concern is that other funds will have to be frozen as investors look to get their money back.
"The problem these funds face is that it takes time to sell commercial property to meet withdrawals," said Laith Khalaf, a senior analyst at Hargreaves Lansdown.
The funds have cash buffers to protect them when investors sell their shares. But those seem to have been exhausted, Khalaf said. The fund managers will now have to sell commercial property to return money to the investors.
"These managers will now be adding to the supply of commercial properties on the market, which is likely to put downward pressure on prices."
The day saw the pound fall another 1.7 percent to $1.3054, its lowest since the vote and the weakest in 31 years.
Shares in real estate companies were battered. Barratt Developments plunged 9.8 percent, Taylor Wimpey 7.1 percent and Persimmon 7.2 percent.
Carney's appearance was his third in the 12 days since the vote. In unfaltering, measured tones, Carney explained that the bank had drawn up extensive contingency plans and that things more moving smoothly.
The move to free up more lending seemed clearly intended to prevent a repeat of the 2007-08 financial crisis, when banks refused to lend to the wider economy in order to keep themselves solvent.
The Bank of England said that, despite a severe hit to the pound and falls of up to 20 percent for bank shares since the EU vote, the banking sector has so far proved resilient, with little sign so far of a credit squeeze.
The central bank said there will be a period "of uncertainty and adjustment" following the referendum and that "market and economic volatility is to be expected as this process unfolds."
Some have expressed concern that the economy will slip into recession amid fears of a drop in investment following the vote. When asked what message he had for British households considering a loan, Carney said that central bankers always advise people to be cautious and prepared to weather ups and downs when taking on a major expense.
"We're advising people to be prudent," Carney said. "If you're taking on a mortgage at some point over the life of that mortgage life will be difficult so you want to make sure as a family or individual to service that when times are tough."
Adela Suliman contributed to this story.