The Bank of England expressed interest in doing whatever it takes to contain the contagion from Brexit.
The U.K. marked our Independence day by locking down $12 billion dollars worth of U.K. property funds. Following a run of redemptions, three of the U.K.’s largest property funds halted trading given fears that their cash balances wouldn’t cover all of the sales. While it looks like the U.K. will exit the E.U., investors can’t exit their U.K. property funds (totaling $32 billion). The freeze by M&G Investments, Aviva Investors, and Standard Life Investments shook investor confidence, driving the pound down even below it’s low immediately following the Brexit vote.
This isn’t the only aftershock roiling the U.K. property market.
On June 29, the United Overseas Bank Ltd.–Southeast Asia’s third-largest bank by assets–halted loans on commercial property in London.
“As the aftermath of the U.K. referendum is still unfolding and given the uncertainties, we need to ensure our customers are cautious with their London property investments”–UOB spokesperson
While the UOB’s main competitors DBS Group Holdings and Oversea-Chinese Banking Corp both continued to offer loans, each advised its clients to think very carefully about foreign exchange risk and sovereign risk.
The Bank of England is stepping into the breach. Of all of the risks it predicted of a Brexit vote, a drop in commercial real estate demand has been one of the first to materialize. One of the BOE’s first moves has been to reverse its decision from March, which had raised capital requirements. The counter-cyclical capital buffer (CCB) has been lowered to zero until June 2017. This decision reduces banks’ capital requirements by 5.7 billion pounds, potentially unlocking up to 150 billion pounds worth of lending.
Brexit has also started to influence the decisions of commercial office tenants. On July 11, WeWork–the world’s largest co-working startup–announced that it was cancelling its plan to occupy 45,000 SF of space in London’s Canary Wharf financial district. It was the first time that WeWork has cancelled a deal in London.
Impacts on the U.S. real estate market remain unclear. Some real estate experts expect a flight to quality, which would serve to boost demand domestically, but buildings with European bank tenants might suffer a softening in demand. Other domestic real estate experts point out that to the extent Brexit is bad for the global economy, it will serve as a headwind for all global markets, including domestic real estate.
