Property lenders should carry out regular, external open-market valuations at whole portfolio asset level that can be submitted with other data for analysis to manage risk, IPD and CBRE have recommended.
They are seeking to sell a commercial, best-practice model to lenders. Their proposal comes as the Real Estate Finance Group debates the challenge of managing real estate lending. It will publish a longer version of its draft A vision for real estate finance in the UK soon.
IPD and CBRE set out their proposals last week in: Lending with confidence: best practice in the analysis and reporting of commercial real estate risk. The paper recommends that the lending industry adopts IPD benchmarking analysis, as used by most UK institutions.
Michael Brodtman, head of UK valuation and advisory at CBRE, said: “There is no pension fund in the country that wouldn’t think it’s good practice. It would help with risk management. The Prudential Regulation Authority needs better information – most banks don’t have the systems.”
IPD and CBRE said their benchmarking model would help banks and lenders with their reporting requirements, both internally, and externally to regulators and, in the case of debt funds, their investors.
“Investors in a whole new generation of debt funds want direct reporting and are setting up systems from scratch. So it is a good time,” Brodtman said.
“A year ago, UK banks were steady state or reducing (their books) and few debt funds were lending, but we’re not in that world anymore, while in another year’s time we might be half way through the cycle. These tools work for institutions, and are pretty cost-effective.”
Their paper also says lenders should take “long-run sustainable yields” into account when originating loans, “to see how market value sits in terms of long-term trends” said Brodtman.
The Vision report suggests lenders should be mandated to use long-term sustainable valuation, linked to regulatory lending capital requirements. Brodtman anticipates “setting up the processes this summer, doing sample work in autumn, to begin analysing next January”.