The Bank of England has announced the start of wide- scale reporting of lending data in response to recommendations from the IPF’s Real Estate Finance Group.
Speaking at the City of London Property Investor’s Banquet on Monday, Alex Brazier, executive director for financial stability at the Bank, told the audience of professional investors that the Bank of England was to begin publishing “market-wide indicators of valuations and cash flows”.
The decision follows recommendations by the IPF’s Real Estate Finance Group, a team set up to create a cohesive strategy for regulation. It is chaired by Nick Scarles, group finance director of Grosvenor.
Among other proposals, the group said borrowers should take on debt levels dependent on cash flows and not on sentiment-driven market prices.
This suggestion Brazier described as “music to our ears” in his speech. He went on to outline the BoE’s desire to achieve this by reporting market-wide indicators of valuations and gearing based on cashflows capitalised at cycle neutral rates.
Brazier said the proposals were expected to come in within months to end a “pernicious spiral” of sentiment- and debt- driven valuations.
“If prices rise because of sentiment rather than cashflow prospects, that should result in greater reliance on equity, rather than debt, finance. So when the inevitable reversal in sentiment happens, it won’t be magnified by an over-indebted industry.”
By publishing the data, the BoE and REFG believe that the industry will have “the information we need to manage the risk of loosening underwriting standards”, said Brazier.
Scarles said: “The creation of a UK-wide commercial real estate loan database, coupled with the use of a long-term value metric to assess lending risk, will be a big step forward in improving financial stability.
“We hope that some or all of our other recommendations will also be implemented. We’re particularly keen to see a commercial real estate qualification for all those involved in commercial real estate lending.”
