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Bank of England warns of risks

Foreign investment in property plunges following Brexit

Mark CarneyForeign investment into commercial property has fallen by half, putting a doubt over the funding of large-scale developments.

The collapse in overseas funding emerged today as the Bank of England moved to shore up lending by the banks amid a warning that its warnings about Brexit were beginning to emerge.

A sharp slowdown in overseas funding will set alarm bells ringing around the property sector.

As bank funding has dried up most of the big real estate developments around the UK have been funded by overseas investors.

The Scottish Property Federation recently warned governments at Westminster and Holyrood not to create obstacles that would stem the flow of such funds.

There will now be concerns that the Brexit vote has inadvertently created such conditions by undermining confidence.

Bank of England governor Mark Carney said today there is evidence that risks it associated with the Brexit vote are now emerging.

The Bank’s financial stability report said there were risks apparent in the commercial property market, with vital foreign inflows falling by 50% in the first three months of 2016.

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“There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging,” said the report.

In response, the Bank has made £150 billion available to high street banks to ensure they continue lending.

The Bank’s financial policy committee also has concerns over “the high level of UK household indebtedness [and] the vulnerability to higher unemployment and borrowing costs” for some households.

House prices could also come under pressure, particularly if buy-to-let investors abandon the market, it said.

The Bank’s move was received as an assurance that the banking system is in more robust shape than in 2008. The FTSE 100 which fell ahead of the meeting, was up 28 points at 2.30pm.

James Athey of Aberdeen Asset Management Investment, said: “These measures are really about Carney aligning the Bank of England’s guns in case the UK economy enters a downturn. Markets are going to be reassured by his pro-activity.

“He’s not waiting for anything bad to happen but rather acting in case it does. It also means that both halves of the BoE: the monetary policy and financial policy are pulling in the same direction.”

Adam Tyler, chief executive of the National Association of Commercial Finance Brokers, said: “Threadneedle Street’s message to the UK’s banks is clear enough: the real economy of average households and everyday businesses should suffer as little as possible in the wake of the EU Referendum result.

“Mark Carney stated that any slowing in credit will be demand-driven, not supply-driven, and that should reassure business owners.

“Having already hinted at interest rate cuts to come, the Bank of England’s latest announcement of a relaxation in capital requirements shows that it is keen for policy responses to crystallise as quickly as economic and market risks. 

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Since the EU Referendum result came in, the appetite for business loans has remained strong. Business owners appear to be of the view that this is a time and environment for growth and opportunity.

“The Bank states in no uncertain terms that the UK’s economy is facing an uncertain and challenging time ahead, but its emphasis on the resilience of the banking system offers a much-needed calm.

“The challenge for the Bank of England and bodies representing businesses like ourselves, is to ensure SMEs continue to receive the funding and support they need as the economy negotiates choppy waters.”

However, the pound came under pressure from the latest moves which added to indications from the Bank that the interest rate will be cut.

Paresh Davdra, chief executive of online foreign exchange company RationalFX, said: “In spite of some camps’ assurances that Britain’s decision to leave the European Union will only make the economy stronger, no one seems to have taken the time to convince the markets and currency traders of this point.

“After its brief and deflated rebound in the final days of June, sterling has again collapsed this morning against the dollar.

“Significant market and political volatility, both in the UK and elsewhere in the West, is causing analysts to adopt a much more bearish position against the pound, with some suggesting that sterling could dive below last week’s trough of 1.31 against the greenback.

“Suggestions of low marks in the region of 1.2 are not uncommon, and while this fall may present a brief boost to competitiveness in exports, an overall dampening of investor sentiment is likely to push the UK closer to a threat of recession in the near future.”

 

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