Bank of England takes advice on long-term value for property lending

Neil Crosby, of Reading University, is advising the Bank of England on methods for calculating long-term sustainable value for use in UK lending.

A long-term value metric is one of three key recommendations that are being taken forward from the A Vision for Real Estate Finance in the UK report produced in 2014, which sought to protect the financial system from damage by commercial real estate lending.

Crosby, professor of real estate at the university’s Henley Business School, has been giving the Bank advice on policy and practice issues surrounding the long term value concept.

The Bank of England made a public show of support for such a metric, as well as for the second of the Vision report’s recommendations, on establishing a comprehensive database of UK real estate loans, in a speech by Alex Brazier on 16 October.

Brazier, the Bank’s executive director for financial stability, said that if a long-term value metric had been applied to UK property loans in the run up to the last crash, the UK would not have suffered such a disastrous credit crunch.

Brazier also said that “in a matter of months, the Bank of England will start reporting market-wide indicators of valuations and gearing based on cashflows capitalised at cycle-neutral rates”.

Last month, the independent group which produced the Vision report, handed responsibility for implementing its recommendations to the Property Industry Alliance Debt Group.

The PIA Debt Group is headed by Aviva Investors’ head of real estate multi manager John Gellatly and Phil Clark, head of property investment at Kames Capital. It has set up three work streams, one each for long-term value, the database and for the third recommendation, a qualification for commercial real estate lenders.

Rupert Clarke, managing partner of Lipton Rogers, is chairing the valuation group which is meeting for the first time this week. Its members include Crosby as well as Ben Elder of the RICS, former head of valuation at DTZ, Robert Peto, Peter Cosmetatos, chief executive of the Commercial Real Estate Finance Council Europe and Nick Scarles, Grosvenor’s group FD who chaired the group which produced the Vision report.

Clarke has also invited a rating agency representative and at least one real estate lender.

Scarles said that the challenge on long-term value “is to come up with what we’ve called an anti-cyclical mechanism. There are plenty of candidates out there, and, as Alex Brazier reported, the Bank has already looked at one which he described as a discounted cashflow but with a standardised capitalisation rate”.

He said Crosby was a natural choice to advise the Bank referring to a paper he co-wrote in 2011, The basis of valuations for secured property lending in the UK. “Neil is doing lots of work and contributing to the Bank’s discussions; he was identified early on as someone who’d covered a lot of this ground already”.

Scarles said he hoped that with “the right drive”, there would be results “coming out by the end of the first quarter next year.”

CBRE Capital Advisers managing director Richard Dakin is chairing the loan database work stream while Andy Rothery, formerly at Deloitte is leading on a CRE lending qualification.