The UK’s seven most important banks and building societies have completed their latest round of stress tests and submitted their results to the Bank of England.
One of the key areas the Bank of England is monitoring is property lending and part of this year’s test is an extreme scenario that sees UK real estate values fall by 42 percent in aggregate and almost 50 percent for prime assets. According to CBRE, the worst-case real estate scenario would translate to half of outstanding loans at LTVs down to as low as 60 percent tipping into default.
The Bank said this week it has received their submissions and begun analysing the results. The Financial Policy Committee (FPC) and Prudential Regulation Authority Board will discuss the analysis and publish any decisions made as a result with the next Financial Stability Report, due on 30 November.
The Bank’s main concern around CRE, as described in previous quarterly Financial Stability Reports, is the effect on UK property values of a sudden reduction in liquidity from overseas investors.
Since Brexit, the Bank has also been in dialogue with the real estate industry over the effect of the 23 June EU Referendum vote on the UK’s £20 billion open ended property funds, a majority of which were forced to close after a spike in redemptions, but which have since begun to reopen.
So far, the funds have reported sales at low discounts to pre-Brexit pricing, in the region of minus 5 percent. CBRE and MSCI have reported aggregate UK valuation falls in July and August of about 3.5 percent in total.
In the Bank’s latest report of the Financial Policy Committee’s September meeting, also published this week, the FPC notes the 60 percent fall in total CRE transactions in July and August, the valuation fall, and the fact that the Royal Institution of Chartered Surveyors recommended its members qualify valuations with uncertainty clauses.
It also observed that external forecasters expected a fall in CRE prices by end-2017 of around 10 percent on average, partly as a result of weaker occupier demand putting downward pressure on rents. “Overall, the FPC judged that the risks of a sharp adjustment in the UK CRE market were crystallising”, the report said.
While it further noted that the major UK banks had been found to be resilient to property market stresses in the 2014 and 2015 stress tests, any “sharp adjustment” in the CRE market “could result in a tightening of credit conditions and affect economic activity.”
The reporting lenders are: Barclays, HSBC, Lloyds, RBS, Nationwide, Santander and Standard Chartered.