The Bank of England has given its backing to the UK property finance industry’s proposal to build a commercial real estate (CRE) loans database and will start reporting valuations and gearing data.
In a speech to the City of London Property Investor’s Banquet last night, Alex Brazier, executive director for financial stability at the Bank of England, said over-gearing in the real estate sector had been a major driver of instability.
“That’s why I welcome the efforts of your industry, in partnership with us, to build a database of CRE loans: a dataset that will be run and managed for the public good, while respecting commercial confidentiality,” said Brazier.
“It can give you, and us, the information we need to manage the risk of loosening underwriting standards.”
The cross-industry A Vision for Real Estate Finance proposal launched last year called on lenders, borrowers and regulators to consider appropriate levels of debt relative to cash flows capitalised at long-term, cycle-neutral, rates.
“The industry proposal is music to our ears,” said Brazier. “If you apply it, it will stop debt running away unsustainably in the good times. And it will cushion the bad times.”
“It’s countercyclical, mirroring the way capital requirements for banks will now operate. And it’s completely in tune with the broader aim of reducing the way finance magnifies cycles.”
The Bank of England will now add its weight to building the loans database.
“So 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,” said Brazier.
“It will help you to measure the risks. And risk that gets measured can get managed, by you and by us.”
However, Brazier warned, the measures were not a panacea.
“They can’t guarantee occupancy rates or rents for you. But had they been used to guide your decisions and our policy, they would have made a real difference in the run-up to the crisis,” he said.
“In fact, the last commercial real estate cycle could have been severely curbed and loss rates for some banks dramatically reduced.”
“So your industry really does deserve great credit for taking the lead in developing the answers,” said Brazier. “Now – when you most feel like celebrating – is the time to start applying them.”