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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Neil Crosby & Cathy Hughes, 2011. "The Basis of Valuations for Secured Commercial Property Lending in the UK," Real Estate & Planning Working Papers rep-wp2011-02, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:repxwp:rep-wp2011-02
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    File URL: http://www.reading.ac.uk/REP/fulltxt/0911.pdf
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    References listed on IDEAS

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    Cited by:

    1. Florêncio Lutemberg & de Alencar Claudio Tavares, 2020. "Protected Collateral Value: An Approach to Valuation of Commercial Properties for Loan Guarantees," Real Estate Management and Valuation, Sciendo, vol. 28(3), pages 1-11, September.
    2. Patrick Krieger & Carsten Lausberg & Kristin Wellner, 2018. "Einblicke in die Gründe für nicht-normalverteilte Immobilienrenditen: eine explorative Untersuchung deutscher Wohnimmobilienportfolios [Insights into the reasons for non-normal real estate returns:," Zeitschrift für Immobilienökonomie (German Journal of Real Estate Research), Springer;Gesellschaft für Immobilienwirtschaftliche Forschung e. V., vol. 4(1), pages 49-79, November.
    3. Gaye Pottinger & Anca Tanton & Achilles Informatio Ltd, 2012. "Flooding and commercial property investment: what's the risk?," ERES eres2012_166, European Real Estate Society (ERES).

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    More about this item

    Keywords

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