Long-term Value Methodologies and Real Estate Lending

4 July 2017

Long-term Value Methodologies and Real Estate Lending

The first stage of work on long term property valuation models for bank lending security purposes conducted by a cross industry working group, in liaison with the Bank of England, has now been published. It evaluates three long-term value methodologies for commercial property: Adjusted Market Value, Investment Value and Mortgage Lending Value.

The first stage of work on long term property valuation models for bank lending security purposes conducted by a cross industry working group, in liaison with the Bank of England, has now been published. It evaluates three long-term value methodologies for commercial property: Adjusted Market Value, Investment Value and Mortgage Lending Value.
 
Professor Neil Crosby has played a leading role on this group in undertaking the analysis associated with two of the three models tested, Investment Value and Mortgage Lending Value. The conclusion of the research demonstrates that long-term valuations would have predicted an overpriced commercial real estate (CRE) market in two previous downturns, including the one that helped precipitate the global financial crisis in 2007/8. Use of these methodologies may help prevent over-lending in a property market upturn which in turn would prevent the next property market downturn leading to another financial crisis.
 
This work has resulted from the Cross Industry Alliance paper, published in 2014, on a Vision for Real Estate Finance in the UK. Professor Neil Crosby took part in the consultation on this paper. It recommended the establishment of a long-term value model for bank lending valuation purposes which could replace or supplement the Market Value model.

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