The British Property Federation (BPF), a membership organisation representing property owners and investors, is currently lobbying the EU over draft regulations which they say may lead to ‘market instability and systemic risk’ in the commercial property sector.
European ministers want to tighten up the over-the-counter (OTC) derivatives market, regarded in Brussels as a contributory factor in the economic crisis. The draft aims to tackle risk by compelling financial organisations to clear their derivatives centrally and provide cash collateral to cover exposure. Commercial property businesses look set to be included in the agreement, along with banks and derivatives dealers, even though they are not financial organisations.
The BPF and the German Property Federation (ZIA), a regulatory and economic lobby group, have sent a letter to UK and German members of the European Parliament’s economic and monetary affairs committee. It states that the regulation could result in greater risk and less transparency in commercial property deals, in turn affecting banks lending to the property sector.
Property firms use the derivatives to hedge against market risks, such as interest rate or currency changes, not to generate returns to shareholders, unlike financial businesses, say the BPF. It points to the established practice of interest swaps and using commercial property as security against such fluctuations. If property companies are forced to use hedging strategies more suited to the financial sector, such as using cash, this makes ‘no sense’, said Peter Cosmetatos, BPF’s director of finance.
The commercial property market’s current model is one that ‘works well’ and change should not be imposed where ‘the implications have not been analysed or understood by policymakers’, he added.
Additional support for the letter comes from the European Property Federation, the European Public Real Estate Association and the European Association for Investors in Non-listed Real Estate Vehicles. The general feeling among these associations is that ‘if it isn’t broke don’t fix it’.
