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The basis of valuations for secured commercial property lending in the UK

The basis of valuations for secured commercial property lending in the UK Purpose – In the context of the financial crash and the commercial property market downturn, the purpose of this paper is to examine the basis of valuation used in the UK commercial property lending process. Post‐crisis there is discussion of countercyclical measures, including the monitoring of asset prices; however there is no consideration of a different approach to property valuation. This paper questions this omission, given the role that valuations play in the bank regulatory process. Design/methodology/approach – The different bases of valuation available to lenders within international valuation standards are identified as market value (MV), mortgage lending value (MLV) and investment value (IV), with MV being the most used in the UK. Using the different bases in the period before the financial crisis, the UK property market is modelled at a national office, retail and industrial/warehouse sector level to determine the performance of each alternative valuation basis within the context of countercyclical pressures on lending. Findings – Both MLV and IV would have produced lower valuations than MV, although there are some practical issues involved in adopting the different bases for the bank lending. Originality/value – The use of a different valuation basis could provide lenders with tools for more informed and prudent lending. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of European Real Estate Research Emerald Publishing

The basis of valuations for secured commercial property lending in the UK

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Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
1753-9269
DOI
10.1108/17539261111183425
Publisher site
See Article on Publisher Site

Abstract

Purpose – In the context of the financial crash and the commercial property market downturn, the purpose of this paper is to examine the basis of valuation used in the UK commercial property lending process. Post‐crisis there is discussion of countercyclical measures, including the monitoring of asset prices; however there is no consideration of a different approach to property valuation. This paper questions this omission, given the role that valuations play in the bank regulatory process. Design/methodology/approach – The different bases of valuation available to lenders within international valuation standards are identified as market value (MV), mortgage lending value (MLV) and investment value (IV), with MV being the most used in the UK. Using the different bases in the period before the financial crisis, the UK property market is modelled at a national office, retail and industrial/warehouse sector level to determine the performance of each alternative valuation basis within the context of countercyclical pressures on lending. Findings – Both MLV and IV would have produced lower valuations than MV, although there are some practical issues involved in adopting the different bases for the bank lending. Originality/value – The use of a different valuation basis could provide lenders with tools for more informed and prudent lending.

Journal

Journal of European Real Estate ResearchEmerald Publishing

Published: Oct 25, 2011

Keywords: United Kingdom; Commercial property; Loans; Property valuation; Secured lending; Basis of valuation

References