Industry Report Recommends Reform of Commercial Property Lending

Posted on 23 October, 2013 by Neil Bird

A report designed to prevent the UK’s financial stability being threatened by a future commercial property market downturn has been issued. The document comes from the Real Estate Finance Group (REFG) – a body comprising leading industry figures – and contains draft recommendations for wider discussion before a final report is published early next year.

A Vision for Real Estate Finance in the UK begins by conceding that financial crises can be ‘caused or prolonged’ by imprudent commercial real estate lending. This can be seen in the difficulties facing UK banks, many of which continue to be hindered by over exposure to non-performing property. It asks whether there are lessons to be learned from the recent crisis and calls for a ‘more effective market and regulatory framework’ to avoid repeating the mistakes of the past.

As a starting point the paper recognises the primacy of market valuations and the recommendations seek to keep intervention to a minimum. Nevertheless it accepts that bubbles are a feature of the cycle, with implications beyond the commercial property industry. Consequently the group believes a ‘focused and proportionate’ framework is desirable and they advance seven proposals as a basis towards regulation.

  • A database of all CRE loans held by banks and other lenders should be mandatory and lenders should be required to maintain real-time risk analysis to which the regulator would have access
  • A committee comprising senior industry and financial experts should be established to examine market indicators and the wider economic outlook and report to the regulator
  • All lenders (not limited to the banking sector) should be required to have an accredited ‘CRE lender qualification’
  • Capital requirements should be linked to the long-term sustainable LTV of the property
  • Capital requirements should reflect the actual risk incurred by CRE loans to encourage safe lending
  • The regulator should recognise the importance of a diversity of lender types and seek to reduce barriers to entry into the market
  • The regulator should apply capital buffers as the market exceeds its full cycle average whether or not a market crash is expected.

Many of these recommendations, particularly a diversity of credit supply and mandatory qualifications for lenders, will be considered sensible. Indeed the report has been welcomed by Ben Elder, the Global Director of Finance for RICS. He believes the recommendations provide ‘an excellent basis on which to explore a comprehensive and holistic approach’ to the challenges facing the market.

“As the expert body in property valuation, we stand ready to work closely with the Bank of England on this and we look forward to helping improve the market in the public interest, enabling a vibrant and sustainable property market for the future,” he said.

The REFG is calling for comments and suggestions before Monday 2nd December 2013. They say it would be helpful to establish which recommendations the industry agrees with and those it doesn’t. They also welcome further recommendations. Click here to download a copy of the report.




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