The Basis of Valuations for Secured Commercial Property Lending in the UK

Abstract

In the context of the financial crash and the commercial property market downturn, this paper examines 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.  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 counter-cyclical pressures on lending.  Both MLV and IV would have produced lower valuations and could have provided lenders with tools for more informed and prudent lending.  The paper concludes by recognising some of the practical issues involved in adopting the different bases for the bank lending role but recommends a change to IV.Commercial property valuation, secured lending, Mortgage lending Value, Market Value, Investment Value