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Are financial services firms over-exposed to London property risk?

Author: ICAEW Insights

Published: 23 Mar 2021

Although the government propped up the property market in the Budget, writing for ICAEW’s Financial Services Faculty, Laura Miller asks whether a fall in prices would cause problems for UK financial services?

The government has thrown its support behind the nation’s bricks and mortar with a series of measures announced in the Spring Budget. The actions are expected to stave off large falls in the value of residential and commercial property, especially in London and the South East, to the benefit of insurers, asset managers and banks as institutional investors. 

Fears emerged at the end of 2020 that rising unemployment, ongoing lockdowns and the end of emergency coronavirus-related financial support schemes would trigger heavy falls in house prices and the value of the capital’s commercial real estate. 

However, the Treasury has announced it will, at least for the short-term, continue its unprecedented financial support to individuals and businesses and so far, these fears have remained unfounded. 

Concerns about commercial property that led some funds to suspend redemptions last year, for example, have faded, and they have reopened. While some sectors reassess the need for so much business space, others, the COVID winners, are demanding more. 

House prices have continued to rise, propelled by the remote working experiment that has encouraged those in shared accommodation to seek their own space, and those in smaller spaces to seek more.

Now newly announced economic policies have revealed the government plans to back the UK’s property markets even further, with specific measures to help homebuyers and businesses with physical premises in sectors most at risk because of COVID. 

“The government is clearly serious about supporting the housing market,” said Vivek Madlani, CEO of first-time home buyer investment app Multiply.

London and the South East, home to the most valuable commercial and residential properties, is where asset managers, insurers and banks tend to have the greatest property exposure and are most vulnerable to value changes. These areas are set to benefit in particular from the Spring Budget measures. 

Trevor Greetham, head of multi asset at Royal London Asset Management, said “it makes sense for investors to diversify, including into commercial property”, with expected negative real interest rates expected to play a major part in bringing COVID debt levels down gradually, hitting returns on cash and gilts. 

The risk game just changed dramatically for UK financial institutions with exposure to property in London and the South East. 

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