Proposed Regulation Could Have Negative Impact on Commercial Property Market

Posted on 10 October, 2012 by Neil Bird

Proposals designed to ensure banks are protected from the potential risks of property lending could have a negative impact on the UK commercial property market, it has been claimed.

 

A simulation by analysts Investment Property Databank (IPD) found that the proposed rule known as ‘slotting’ could “exacerbate economic risks” by forcing more sales and further depressing the market. It could also encourage dependence on foreign and unregulated lenders, the study warns.

Currently banks have their own guidelines for assessing risks but the Financial Services Authority (FSA) wants to formalise the arrangements and has suggested that loans should fall into one of five standardised slots.

The slots are;

  • Strong
  • Good
  • Satisfactory
  • Weak
  • Default

Banks will then be required to hold higher amounts of capital against loans depending on which slot they are placed in.

The IPD report criticises the limited number of slots available, saying that this would discourage a detailed risk analysis. The practice would also increase the cost of finance for borrowers, leading to fewer property transactions, a fall in construction activity and negative consequences for the wider economy.

IPD used data relating to 3,442 UK commercial properties to find out what would happen to the market if slotting were in place and we suffered a slump identical to that of 2007. Phil Tilly, managing director of IPD in the UK and Ireland said the problem with the risk models is the lack of sound data going in to them.

He concluded; “Based on our findings, slotting could cause serious harm if the impact on the property market and its relationship to the wider economy are not fully understood.

“We see potential for a more risk sensitive UK regulatory regime that would provide capital cost incentives to lend in an economically efficient and stabilising manner. We hope to do further research using the IPD Databank to inform the debate.”

 




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