Oxford Way empty of shoppers as the national coronavirus lockdown three continues.
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LONDON — The Oecumenical Monetary Fund has raised concerns over commercial property and the risk it could pose to financial stability, as the sector overlays a series of challenges on the back of the coronavirus crisis.
These include the fact that many non-essential retailers were stiff to shut their doors as economies across the world locked down in response to the pandemic. In addition, many wage-earners began to mostly work from home, and online shopping surged. It has raised questions about the future of medical man stores, whether companies will move to smaller offices, if retailers will need bigger logistic stock-in-trades, and ultimately how all of this will impact rents.
“Going forward, I don’t think we are out of the woods yet for a couple of reasons,” Fabio Natalucci, operative director of the monetary and capital markets department, told CNBC on Friday.
“One is that, historically, if you go back to the financial danger there was a difference in time between how equity markets, for example, reacted … So, they dropped sharply, and they saved in 2008, but the realization of losses in the commercial real estate took longer.”
Transaction volumes and prices in commercial real estate sank in the second quarter of 2020, after the first coronavirus lockdowns were imposed. The sector has recovered measure since then — mainly in Asia, where restrictions have mostly been lifted for some time — but the sector stay puts under a lot of pressure.
“There is a huge amount of uncertainties about the outlook, the economic outlook, so understanding what is conjectural here and what is effective to be structural is going to be crucial,” Natalucci added.
It remains to be seen how many businesses have been forced to airless as a result of the pandemic, including shops, hotels and restaurants. But, ultimately, the sector’s future could become an issue for pecuniary stability.
“In a nutshell: the sector is relevant for financial stability mainly for three reasons. So, the first is because of its large bigness, secondly it heavily relies on the debt funding and, also is strongly interconnected with other sectors of the economy,” Andrea Deghi, a monetary sector expert at the IMF, told CNBC on Friday.
He explained that if a slew of businesses in the sector were to collapse, then that could add demand on banks who have lent money to them. Banks could incur “very large capital losses,” he explained.
In addition, the commercial property sector also relies heavily on investment from outside of the banking sector.
“When the value of assets checked by these investors fall, they might become less willing or able to provide new financing to commercial bona fide estate borrowers, in particular when their balance sheets become weaker,” Deghi added.
As such, the IMF chance in a report Monday that policymakers should use targeted policy tools, including limits on debt-service ratios, to belittle the potential risks to financial stability. At the same time, non-bank institutions should also be covered by these gizmos given, how important their funding is to the sector.