Bank of England needs to act to see better values for real estate

Last October a self-appointed, Investment Property Forum-sponsored group published A Vision for Real Estate Finance in the UK, to stimulate discussion and make recommendations for a market structure and regulatory regime to protect the financial markets against property cycles.

The report, with seven draft recommendations, is being expanded and rewritten to take account of initial feedback. One of the recommendations is for real estate lending regulatory requirements to be linked to a property’s long-term sustainable LTV (LTSV), rather than open-market value.

In December, at a speech to the 20th anniversary dinner of the Bank of England Commercial Property Forum, BoE executive director Andrew Haldane said: “The recommendation that caught my eye related to valuation, which is at the heart of the pro-cyclical spirals we have seen in the commercial property market.

“Peaky valuations can give the appearance of a safety margin, causing lenders to loosen their grip on credit conditions, driving valuations higher. One way to slow that spiral would be to base lending decisions not on spot, but medium-term or sustainable valuations.”

The Vision report stresses LTSV should supplement, not replace, open-market valuations. This would have a cost implica-tion, as would a recommendation that the UK should have a national lender database with information at individual loan level. In this month’s Viewpoint, experienced valuer Robert Peto highlights some of the issues that would need to be addressed for LTSVs to work.

Peto gets to the nub of the matter, which is that whatever weaponry is put in its armoury, the BoE must use it. This didn’t happen prior to the last crash; the signs were there and the Commercial Property Forum tried to alert the bank’s predecessor, but the FSA paid no attention until it was too late.