British property panic a red flag for banks, insurers

Fri Jul 8, 2016 2:00am EDT
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By John O'Donnell and Lawrence White

FRANKFURT/ LONDON, July 8 (Reuters) - The run on British property funds has drawn attention to the vulnerability of the commercial real estate sector, largely funded by domestic banks and building societies but increasingly by foreign banks and insurers.

UK banks and building societies had around 90 billion pounds ($117 billion) in credit extended to domestic commercial real estate at the end of 2015, according to a study by De Montfort University.

German, other international and U.S. banks had 55 billion pounds of exposure, having increased their investments in the sector since the 2008 financial crisis. Insurers, which prior to the crisis had barely any exposure accounted for 25.9 billion.

This means they could all take a hit if Britain's vote to leave the European Union leads to a slowdown in business investment and depresses demand for offices and shopping centres, as expected.

"There is a lot of uncertainty at the moment," said Sonja Knorr, a funds analyst in Germany at rating agency Scope.

"Transactions in the UK have come to a halt."

The total value of UK outstanding commercial real estate debt, stood at 183.3 billion pounds as at Dec. 31 2015, the De Montfort study said.

The uncertainty has already caused panic among some commercial property investors. In the past week, more than 18 billion pounds of investor cash in commercial property has been frozen as funds run by M&G Investments, Standard Life Investments and Threadneedle Investments, among others, suspended trading.   Continued...