Experts’ real estate finance vision aims to prevent crash

Recommendations include linking CRE lending to long-term LTVs

Radical reform of lending practices to prevent another commercial real estate crash has been proposed by a group of industry experts.

The Real Estate Finance Group has published seven recommendations which it says would help curb over-enthusiastic lending at the top of the cycle and prevent another debt-fuelled property crash threatening the UK’s financial stability.

Its paper, A Vision for Real Estate Finance, proposes:

• The regulatory capital requirements for CRE lending should be linked to a property’s long-term, sustainable loan-to-value ratio; that is, the average value of a property through the market cycle, rather the current market value. This is along the lines of models used by Germany’s pfandbrief banks and by credit rating agencies.

• A finer way of calculating regulatory capital on CRE bank lending than slotting, which better reflects the level of risk in CRE loans and allows more differentiation in the capital required for different loans.

• Recognition by regulators of very low-risk lending by banks, such as loan to-value levels below long-term sustainable ones.

• Regulators should use “governors”, that is, capital buffers that could be increasingly applied, cyclically or to sectors, to deflate property bubbles before they balloon out of control. Market data would be used to decide when values have boomed over their
whole-cycle average.

• There should be a database of all UK CRE loans and key lenders should be required to maintain a real-time risk analysis of their books – including appropriate ‘stress- testing’ of positions – with the regulator having access to these and overall market risk analysis.

The REFG also recommends that key members of all CRE lending teams, whether in banks or other organisations, should have a “CRE lender qualification”, kept up to date through continuing professional education.

It also points out that there needs to be a way to get a more consistent and diverse flow of debt into regional property markets and to smaller borrowers and assets.

The group doesn’t propose a solution, but makes a number of suggestions, such as standardising loan criteria and documentation, and, more radically, having ‘loan managers’ with powers and responsibilities who can conduct binding negotiations with lenders.

The REFG wants an industry-wide discussion and will produce its final report in early 2014.

Sponsored by the Investment Property Forum, it grew out of the Commercial Property Forum, hosted by the Bank of England.

The 12 members include Matthew Webster, HSBC head of real estate financing; Marc Mogull, managing partner of Benson Elliot; John Gellatly, head of European property multi-manager at Aviva Investors; CBRE head of valuation Michael Brodtman; and new CREFC Europe CEO Peter Cosmetatos. It is chaired by Grosvenor finance director Nick Scarles.