The Bank of England today warned the commercial property sector could be set for more trouble due to turmoil in the financial markets.
In the Bank’s bi-annual Financial Stability Report, commercial property is identified as vulnerable because of the previous boom in the sector.
The slowing of price inflation after the bullish markets of early 2007 combined with a large development pipeline that may with a potential for over capacity could lead to the cash crisis re-emerging in the property industry, the Bank said.
‘Although vacancy rates are currently low,’ the report said, ‘the potential for over-capacity would be further increased if the recent financial market turbulence has a dampening effect on the demand for office space by the financial sector.’
It also pointed out that lenders had already tried to tighten terms on the sector whose 9% share of major UK bank lending is now above the previous peak before the early 1990s market crash.
Slowdown
The 78-page report said the the price of commercial property derivative contracts suggests further falls.
‘Contacts are surprised at the speed of the slowdown,’ says the report. ‘Which they expected to be more pronounced for secondary than prime commercial property.’
The Bank also predicts that, if the current vulnerabilities in the market crystallise, the impact could be more severe than in the past because of a lack of confidence and continued tightness in wholesale funding markets following Northern Rock’s collapse.
