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Bank of England issues boom and bust warning to commercial landlords

Alex Brazier, the Bank of England's (BoE) Executive Director for Financial Stability, Strategy and Risk, recently implored commercial property investors to learn from past business cycles and "act now" to avoid being ruined by a fall in the market. What's behind these comments?

Solid gains

UK commercial property seems to be going from strength to strength: London estate agent Knight Frank announced 13% growth in sales over the past year, while the Crown Estate revealed a 16% rise in the value of its assets over the same period.

These figures aren’t isolated cases, and reflect sentiments that are broadly held among those in the know. Savills expects strong market confidence to continue into 2016, while Legal & General Investment Management’s Rob Martin thinks increasing rents are likely to replace 'yield compression' as a driver of capital growth. Such progress never continues indefinitely, but shouldn't landlords make hay while the sun shines?

Measuring and managing risk

Tom Stevenson of Fidelity Worldwide Investment argues that while the market may be in midst of an inflating bubble, investors can profit from playing brinksmanship for a while yet. This is the attitude Mr. Brazier has in mind when warning against getting caught in the "exuberance" of the moment – commercial landlords should take advantage of present opportunities, but should avoid hubris even if the end isn't in sight.

In fact, the BoE is so concerned by investors’ borrowing that it is releasing new financial information based on conservative readings of the market. The idea behind this data is to encourage financial prudence by giving commercial property owners a realistic take on the sector's maturity.

The message

It may be the case that UK commercial property won't crash in a firesale frenzy and, as the division among experts suggests, no one can be sure how the market will move. By the same token, however, commercial landlords can absorb plenty of wisdom from the BoE's recent comments: the best way to proceed is by ensuring that investment decisions are based on realistic estimations of financial health.

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