Are We Heading For Another Commercial Property Crash?

The Bank of England have recently announced they need to keep a watch on the commercial property market which they fear might be in danger of overheating once again.  Investment levels are nearing the pre-crash high they reached in 2006.

The real estate market, whether commercial or domestic, is quite widely varied depending on area, but as an example, commercial property for sale in Cambridge saw capital values plummet by 50% between 2007 and 2009, which is a situation everybody fears could be repeated.

Officials at the Bank of England are concerned about the obvious relaxation of lending rules in the current UK commercial property market as recent minutes from the Bank’s financial market watchdog have shown.

In March this year, the minutes of the meeting of the Financial Policy Committee (FPC) showed that the Bank’s policymakers were seeing ‘signs of some relaxation’ in underwriting values for commercial property loans.

Their observations came less than a week after the Bank said it would be running stress tests in the summer on how Britain’s residential mortgage lenders would cope in the event of a property market shock, like a collapse in house prices or a rise in interest rates that is steeper than anybody expected.

Are We Heading For Another Commercial Property Crash?

The FPC monitor threats to the stability of the Britain’s financial system.  They noted that commercial real estate transactions totalled nearly £55 billion in 2013, which is only just short of the pre-financial crisis peak.

It was said that most of the deals were being financed without buyers having to take on large debts.  One estimate suggested that 75 per cent of transactions in 2013 were financed exclusively by equity. This is a particularly frightening figure when you consider that in 2007, only a quarter of purchases were financed in this way.

The relaxation in the lending criteria follows many years where commercial property lending had almost totally dried up or was only available on the most arduous terms.

However, the minutes of March’s meeting suggested that officials were satisfied that the commercial property sector was not, at that time, posing a risk to the financial system.

But they also provided further indication that the Bank had begun keeping a closer eye on the property market for signs of overheating.

The real estate market, whether commercial or domestic, is quite widely varied depending on area, but as an example, commercial property for sale in Cambridge saw capital values plummet by 50% between 2007 and 2009, which is a situation everybody fears could be repeated.

Bank officials still maintain that household debt levels are lower than before the financial crisis hit.  But the FPC minutes stated that rising interest rates could pose obstacles in some sectors of financial markets. Changes to the way the banks are structured since the crisis have made it more challenging to judge the effect that any surprises may have.

Meanwhile, the Bank intends to meet later this year to discuss how to resuscitate the securitisation market, which is widely seen as one of the factors that led to the financial crisis.

Bank officials have previously stated that securitisation, if it were properly managed, could be a significant way for businesses to raise funds for investment.