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The Basis of Valuations for Secured Commercial Property Lending in the UK

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Author Info

  • Neil Crosby

    ()
    (School of Real Estate & Planning, Henley Business School, University of Reading)

  • Cathy Hughes

    (School of Real Estate & Planning, Henley Business School, University of Reading)

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    Abstract

    In the context of the financial crash and the commercial property market downturn, this paper examines the basis of valuation used in the UK commercial property lending process. Post-crisis there is discussion of countercyclical measures including the monitoring of asset prices; however there is no consideration of a different approach to property valuation. This paper questions this omission, given the role that valuations play in the bank regulatory process. The different bases of valuation available to lenders within International Valuation Standards are identified as Market Value (MV), Mortgage Lending Value (MLV) and Investment Value (IV), with MV being the most used in the UK. Using the different bases in the period before the financial crisis, the UK property market is modelled at a national office, retail and industrial/warehouse sector level to determine the performance of each alternative valuation basis within the context of counter-cyclical pressures on lending. Both MLV and IV would have produced lower valuations and could have provided lenders with tools for more informed and prudent lending. The paper concludes by recognising some of the practical issues involved in adopting the different bases for the bank lending role but recommends a change to IV.

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    File URL: http://www.reading.ac.uk/REP/fulltxt/0911.pdf
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    Bibliographic Info

    Paper provided by Henley Business School, Reading University in its series Real Estate & Planning Working Papers with number rep-wp2011-02.

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    Length: 38 pages
    Date of creation: 2011
    Date of revision:
    Handle: RePEc:rdg:repxwp:rep-wp2011-02

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    Web page: http://www.henley.reading.ac.uk/
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    Related research

    Keywords: Commercial property valuation; secured lending; Mortgage lending Value; Market Value; Investment Value;

    This paper has been announced in the following NEP Reports:

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    1. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    2. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980, September.
    3. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    4. Allen, Franklin & Gale, Douglas, 1999. "Bubbles, Crises, and Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 9-18, Autumn.
    5. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-55, January.
    6. repec:sae:niesru:v:211:y:2010:i:1:p:r3-r16 is not listed on IDEAS
    7. repec:nsr:niesrd:330 is not listed on IDEAS
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