WRITTEN BY – POOJA MEHRA, PROPCORNER STAFF
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.
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.
The concern is about the skyscrapers, shopping centers and other big buildings that have come to epitomise 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.
The funds have cash buffers to protect them when investors sell their shares. But those seem to have been exhausted. 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.
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. 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.