LONDON — The British pound dropped sharply Tuesday to a 31-year low on concerns that the country’s decision to leave the European Union will 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 because of 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 and move operations to mainland Europe to retain access to the EU market. That would vacate office space and weigh on real estate values in Britain’s capital.
Aviva Investors, Standard Life and M&G Investments said they froze the property funds to protect other investors who wished to remain in the funds.
“Redemptions have now reached a point where M&G believes it can best protect the interests of the funds’ shareholders by seeking a temporary suspension in trading,” the company said of the $5.8 billion fund.
The moves came as the Bank of England worked to reassure markets that it would avoid a repeat of the 2007-08 financial crisis, freeing up more money for loans to business and households. 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.
“We have a clear plan. We’re putting measures in place,” Bank of England Gov. Mark Carney said. “And it’s working.”
In a time of political upheaval, Carney sought to offer the counterpoint of confidence and control, announcing changes to the amount of rainy-day funds banks have to hold. The move is intended to help the banks lend as much as $199 billion more, supporting the economy during the uncertainty surrounding the exit from the EU’s single market.
Carney, however, said some of the risks to the economy predicted before the referendum had, in fact, begun to crystalize.
Among them was concern about the skyscrapers, shopping centers and other big buildings that have come to epitomize 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 had taken in capital from overseas and 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,” said Laith Khalaf, a senior analyst at Hargreaves Lansdown.
The funds have cash buffers to protect them when investors sell their shares. But those seem to have been exhausted, Khalaf said. 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,” Khalaf said.
The pound fell another 1.7 percent to $1.3054, its 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.
Carney said the bank had drawn up extensive contingency plans and that things were moving smoothly.
The move to free up more lending was intended to prevent a repeat of the 2007-08 financial crisis, when banks refused to lend to the wider economy in order to keep themselves solvent.
The Bank of England said that, despite a severe drop for the pound and declines of up to 20 percent for bank shares since the EU vote, the banking sector has so far proved resilient, with little sign of a credit squeeze.
The central bank said there will be a period “of uncertainty and adjustment” after 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 after the vote. When asked what message he had for British households considering a loan, Carney said that central bankers always advise people to be cautious and prepared to weather the ups and downs when taking on a major expense.
“We’re advising people to be prudent,” Carney said.
Information for this article was contributed by Adela Suliman of The Associated Press.
[Source:- Arkansas Online]
