The enthusiasm of the authors of A vision for real estate finance in the UK is evident, but the strength of their proposals is not. A summary of the report in the Bank of England’s May paper Should the availability of UK credit data be improved? asked for views on the costs and benefits of the proposals. The industry, lenders and borrowers must take a hard look at Vision and ask tough questions.
Peter Cosmetatos, chief executive of CREFC Europe and one of Vision’s authors, says the central proposal is to create “a mandatory, universal and substantially public database of UK CRE loans” which “could revolutionise the UK CRE debt market”.
However, Vision does not explain how data will be collected or used. Filling the database comes first and interpretation by academics and analysts later. Their Grail is a link between loan characteristics and the market’s future state. They don’t know whether valid analysis will
emerge, but just hope more data will mean more understanding. They do know they want new legislation to enforce Vision.
Will key indicators emerge from analysis of historic real estate data? The augurs are not good. Reasonable data on residential loans has not led
to good predictions of house price movements. The information has charted “what just happened”, not divined future market performance.
Economic problems for commercial tenants can hit CRE’s value for owners and, if a downturn is strong, lenders too. Perhaps if we analysed 100 loans in detail we would learn more, but no-one appears to have tried it yet. The authors play down what is available now (essentially the De Montfort report) as “it is not built up from individual loan data”.
sample portfolios needed
If that’s the problem, surely the first step is to analyse a sample loan portfolio? Let willing lenders provide loan-by-loan data to help develop
analytical tools and test for correlations (if any). It is not certain that we would learn anything useful, as a significant correlation may not exist. If we posit three ‘simple’ influencing factors, say tenant credit status, lease length and asset quality, the analysis will try to correlate these variables to the economic consequence – a difficult task.
Add variables such as location or management quality and the task of achieving correlation grows exponentially. Any correlations should also be identifiable on a sample basis: seeking comprehensive coverage is statistically irrelevant.
Nonetheless, Vision expects lenders by law to contribute timely material to a comprehensive central database. Will the authorities want
only factual data (leases, loan lengths) or also subjective material? The initial standard may be modest but increased demands are likely.
Also, while lenders may be mainly responsible for providing data, the task and cost of collecting it are sure to be passed on to borrowers. There
are no costings for setting up the database or an ‘office of CRE loan registrations’ to oversee data providers’ performance, but the expense is likely to be substantial. In short, Vision proposes bringing legal regulation into recording property data, without having any idea whether it will produce useful results.
Vision’s other deficiencies include: reliance on a new valuation measure of “underlying long-term value”, based on German ‘beleihungswert’
(frequently assessed as replacement cost), which is not obviously relevant to the UK; the inconsistency of requiring managers to report in
detail on debt funds, but not equity funds; and the latest proposal to set up an expert committee to advise the Bank of England, which differs
materially from the earlier one, with neither being obviously satisfactory.
Vision would benefit from closer scrutiny by industry groups that may have thought they were not affected. The immediate challenge is to tell the Bank of England that we do not see the case for legislation, new bureaucracy or committing to an uncertain goal.
Paul Rivlin is co-founder and joint chief executive of Palatium Investment Management