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Commercial property market showing signs of overheating, warns Mark Carney


12-08-2015

 

Bank of England Governor says sharp increase in commercial property values raises concerns about financial stability

European regulators are
Sir Jon Cunliffe noted that commercial real estate was an area where 'historically British banks have taken large losses in downturns' Photo: Bloomberg
 

Mark Carney told the European Parliament that commercial real estate valuations had moved "quite notably in a number of jurisdictions", which warranted closer monitoring.

Speaking in his capacity as the vice-chair of the European Systemic Risk Board (ESRB), Mr Carney noted that foreign cash had helped to push up property prices substantially.

Mr Carney pinpointed risks linked to publicly-traded funds such as unit trusts, which club together investors' cash to buy office blocks and other commercial ventures.

"We are watching some developments, including the developments in the public-traded commercial real estate market ... to ensure that’s not a potential amplification channel of financial instability," he said.

While Mr Carney said "no action" was required at this stage to rein in the market, he told MPs that "monitoring makes sense".

The Bank of England flagged the dangers posed by the commercial property market in its latest Financial Stability Report (FSR) this month.

Sir Jon Cunliffe, deputy governor for financial stability, noted that commercial real estate was an area where "historically British banks have taken large losses in downturns".

Prices in London were particularly stretched, according to Sir Jon, while the latest FSR described some prime West End offices as "overvalued".  

Mr Carney also warned on Monday that the so-called Solvency II rules for insurers needed reform.

"In my view, more can be done to ensure that Solvency II creates the right framework for long-term investment," he said.

Mr Carney did not elaborate on which part of the Europe-wide measures, which are due to come into effect in January, needed to change.

However, insurers have complained that quirks in the rules mean they are effectively punished for investing in long-term infrastructure projects, which may not be eligible as capital under the rules because they cannot be easily be sold on.

He also said a "number of issues" remained around the "unintended consequences of financial regulation" that were likely to increase as more of it is "implemented and bedded down".

"One area is around market liquidity, and the potential fragility of markets," he said.

Mr Carney said the ESRB and the Financial Stability Board (FSB), where Mr Carney serves as chairman, were looking at the forces behind recent bouts of illiquidity, including the so-called "flash crash" in US Treasuries in 2014 and the "bund tantrum" this spring.

"[We're examining] to what extent there is a regulatory cause versus a change in trading strategies," he said.

Mr Carney also repeated his criticism of EU bonus caps, which he said had "tempered" regulatory efforts to tackle misconduct and meant the proportion of compensation that can be clawed back had "gone down substantially".

www.telegraph.co.uk/

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