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

  • 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)

Registered author(s):

    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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    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
    Contact details of provider: Postal: PO Box 218, Whiteknights, Reading, Berks, RG6 6AA
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    Web page: http://www.henley.reading.ac.uk/

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    1. Allen, Franklin & Gale, Douglas, 1999. "Bubbles, Crises, and Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 9-18, Autumn.
    2. Dilip Abreu & Markus K. Brunnermeier, 2002. "Bubbles and crashes," LSE Research Online Documents on Economics 24905, London School of Economics and Political Science, LSE Library.
    3. repec:nsr:niesrd:330 is not listed on IDEAS
    4. Andrei Shleifer ad Robert W. Vishny, 1995. "The Limits of Arbitrage," Harvard Institute of Economic Research Working Papers 1725, Harvard - Institute of Economic Research.
    5. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980, March.
    6. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-55, January.
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