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Emerald Group Publishing Limited
Regulation, promulgation and certification
Article Type: Editorial From: Journal of Property Investment & Finance, Volume 32, Issue 6.
We cannot solve problems by using the same kind of thinking we used when we created them (Einstein, 1946).
But that is exactly what we are trying to do in the UK economy (Nick French).
In her editorial in the last issue of the Journal of Property Investment & Finance, Laura Gabrielli very eloquently argued that the impact of the Financial Economic Crisis of the late 1990s had been so deep and so wide ranging that the all the players in the market (bankers, investors, developers, politicians, policy makers, consumers and households) will have learnt from the experience and that a new paradigm and a new way of managing real estate within society will be forthcoming. I echo that sentiment. You would think that would happen. However, I have a cynical view that self-limitation and regulation can never happen.
The problem is that, as a society, we don’t learn. Investment and development is driven by a need to make money, more money can be made if the investment is geared and gearing is possible when the banks are lending at interest rates below the expected return of the investment. Bank lend because they expect to make money on the loans and will always lend if they believe that the risk of default is low and priced into the interest rate agreed. Thus, as soon as the banks start lending again, the cycle of debt-driven investment and development will start again in earnest.
As it stands, UK banks got so badly burnt with the crash leading to the Financial Economic Crisis of 2008 onwards that commercial property lending is still limited. Indeed, in 2013, UK banks reduced property lending by £17.2 bn (Trotman, 2014). The banks are still wary but that will change. Memories are short and when economic conditions improve (as they are in the UK due to a surge in consumer spending) then the cycle will start again.
Unless the markets are regulated. Only regulation will stop a repeat of the excesses of the noughties: regulation of banks, regulations of valuers, regulation of capital markets and the regulation of professional bodies. The good news is that this is happening. Slowly. But it is happening.
In my own area of valuation, the International Valuation Standards Council (IVSC) is fully aware of the need to improve valuation standards and work with indigenous valuation organisations (Valuation Professional Organisations (VPOs)) around the world to improve transparency, education regulation and certification (at the VPO level). In a letter to the Financial Times David Tweedie (2013), the Chairman of the IVSC's Board of Trustees, wrote:
Sound valuation is critical both as an input for the smooth functioning of financial markets and institutions, and as an output from financial systems in their role of allocating capital efficiently across the economy. Valuation issues are integral to today's financial system and they must be addressed before we can even begin to consider moving on from the crisis.
The only way that this will be achieved is with the strong regulatory backing. We may like to believe that markets learn from their previous mistakes and that regulation is superfluous. But the truth is that every recession since Victorian times has been preceded by a long period of deregulation. Capital markets will always be cyclical due to the behavioural nature of players in the market but regulation can temper the volatility. Unfortunately, self-regulation of individuals is a unrealisable dream. We need regulation and better standards and ethics at a professional, market and governmental level. Watch this space to see if there is the political around the world to grasp this nettle.
Einstein, A. (1946), New York Times Magazine, New York, NY, June, p. 7
Trotman, A. (2014), Telegraph, London, 11 July, p. 17
Tweedie, D. (2013), Financial Times, 11 September, p. 10