By John O'Donnell and Lawrence White
FRANKFURT/ LONDON, July 8 (Reuters) - The run on British
property funds has drawn attention to the vulnerability of the
commercial real estate sector, largely funded by domestic banks
and building societies but increasingly by foreign banks and
insurers.
UK banks and building societies had around 90 billion pounds
($117 billion) in credit extended to domestic commercial real
estate at the end of 2015, according to a study by De Montfort
University.
German, other international and U.S. banks had 55 billion
pounds of exposure, having increased their investments in the
sector since the 2008 financial crisis. Insurers, which prior to
the crisis had barely any exposure accounted for 25.9 billion.
This means they could all take a hit if Britain's vote to
leave the European Union leads to a slowdown in business
investment and depresses demand for offices and shopping
centres, as expected.
"There is a lot of uncertainty at the moment," said Sonja
Knorr, a funds analyst in Germany at rating agency Scope.
"Transactions in the UK have come to a halt."
The total value of UK outstanding commercial real estate
debt, stood at 183.3 billion pounds as at Dec. 31 2015, the De
Montfort study said.
The uncertainty has already caused panic among some
commercial property investors. In the past week, more than 18
billion pounds of investor cash in commercial property has been
frozen as funds run by M&G Investments, Standard Life (LON:SL)
Investments and Threadneedle Investments, among others,
suspended trading.
While ordinary retail investors stand to lose most
initially, some funds have been paring back the value they put
on their property - a signal that a price drop is likely. That
would hit the banks that lent or insurers invested in property.
Legal & General's fund arm and F&C Investments both cut the
value of their UK property funds on Thursday to discourage
withdrawals.
"Property is so much about confidence," said Danny Cox of
broker Hargreaves Lansdown (LON:HRGV). "Once you have this kind of dent, it
will take a time to come back."
While UK banks' exposure to the sector is high, accounting
for 45 percent of lending last year, according to the De
Montfort Commercial Property Lending Report, it is down from
over two thirds a decade ago.
UK banks' loans to the sector have declined every year since
2009, according to Bernstein Research, only returning to slight
growth in March this year.
Meanwhile, German banks had more than 18 billion pounds of
outstanding loans in British real estate compared to 10.5
billion of U.S. peers at the end of last year, De Montfort said.
For some foreign lenders, commercial property may still be
attractive proposition because of the fall in the value of the
pound.
"A 17 percent fall in the value of sterling makes
investments in Britain interesting, despite the Brexit. That
goes for UK property as well, an area we are now looking at,"
said Andreas Gruber, chief investment officer of German insurer
Allianz (DE:ALVG), responsible for investments of 640 billion euros.
"The lower value of the currency offers an attractive
discount."
($1 = 0.7679 pounds)
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(Editing by Anna Willard)