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

Neil Crosby (School of Real Estate & Planning, Henley Business School, University of Reading, Reading, UK)
Cathy Hughes (School of Real Estate & Planning, Henley Business School, University of Reading, Reading, UK)

Journal of European Real Estate Research

ISSN: 1753-9269

Article publication date: 25 October 2011

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.

Keywords

Citation

Crosby, N. and Hughes, C. (2011), "The basis of valuations for secured commercial property lending in the UK", Journal of European Real Estate Research, Vol. 4 No. 3, pp. 225-242. https://doi.org/10.1108/17539261111183425

Publisher

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Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited