The Strategist

Norwegian sovereign fund wrote off 5% of investment in the UK property

08/22/2016 - 15:29

Norges Bank Investment Management ($ 890 billion under management) lowered value of its investment in UK property by 5%. Almost a quarter of all investments in real estate of the Norwegian fund, totaling $ 27 billion, accounted for the UK, in particular, 16% - for London.

FT quoted Trond Grande, the bank’s Deputy Chief Executive Officer: "Brexit, in all probability, will have an impact on the UK and London real estate market, and we have written off value of our portfolio to reflect this. However, we believe that it is too early to talk about a full impact". 

The Norwegian sovereign fund bought a complex of buildings in London's Oxford Street for 124 million pounds ($ 161 million) even after the British referendum. The organization received a 15% discount since the seller, Aberdeen Asset Management, was in a hurry with the sale trying to meet requests of investors to withdraw money from the fund. Moody’s, in turn, believes, that a two year-long unfavorable situation in the UK real estate market would result in a cumulative loss of 12 billion pounds ($ 15 billion) for six local banks. In July, prices for commercial real estate in the UK fell by 2.8%, shows the MSCI index of IPD. This was the biggest drop since March 2009.

Royal Bank of Scotland (RBS) faces the biggest loss of 4.1 billion pounds. This is 16% of its investments in commercial real estate, namely, offices, stores, hospitals, hotels, warehouses and industrial premises.

Moody's baseline scenario meant a 10% drop in prices for commercial real estate in comparison with 45% during the 2008 crisis. "Now, it will be easier for British banks to cope with deterioration of asset quality in their portfolios than during the crisis of 2008-2009. However, we still believe that new stresses can put pressure on particular assets", - said Moody's.

RBS does not agree with Moody's predictions. "I do not know where they got those numbers", - said Paul Coates, Head of Real Estate Department at RBS. According to his version, stress tests conducted by the Bank of England in 2015 showed that the 30% drop in prices for commercial real estate would mean 900 million pounds’ loss for RBS during three years. 

In July 2016, cost of housing in the UK has been falling for the second month in a row. According to real estate portal Rightmove, housing prices for the 4 weeks, ended August 6, descended by 1.2% compared with the previous four-week period.

However, Rightmove pointed out that the traditional "autumn take-off" of the housing market would the more important factor. 

Expectations of decline in housing prices and sales of homes in the UK have led to a significant drop in stock price of real estate services companies after the June referendum on the country's membership in the EU.

Messages from the housing market are contradictive. For example, survey data of the Royal Institution of Chartered Surveyors (RICS) show that representatives of the real estate market currently estimate its prospects are more optimistic than immediately after the Brexit decision. At the same time, real estate brokers, such as Countrywide, Foxtons and LSL, warned of possible deterioration of the profit due to lower sales.

"We will have a clearer idea of  Brexit’s consequences for the housing market by the autumn. Bank of England’s recent reduction of the base rate has made already cheap borrowing even cheaper, which supported consumer confidence in the sector", says Miles Shipside, an analyst at Rightmove. 


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