The industry should welcome the Bank of England’s wise conclusions following its consultation on the creation of a comprehensive UK commercial real estate loan database.
The Bank finally published its conclusions at the end of November. It had heard from both supporters and opponents of the loan database recommendation made by the Real Estate Finance Group in a report issued in October 2013, A vision for real estate finance in the UK. The Bank confirms that most respondents agreed that lenders and regulators have insufficient access to the information needed to understand the market and assess lending risks.
Crucially, the Bank concluded that the commercial real estate loan database proposal should be pursued separately from its drive to improve data on SME lending markets. This is good news, because policymakers’ tendency to sweep CRE into initiatives aimed mainly at other, bigger targets has caused our industry no end of problems in recent years. The Bank is also very clear that it will engage closely with participants from the CRE industry to ensure that the benefits of developing a CRE loan-level database outweigh the costs. Thankfully, a regulatory initiative affecting CRE will be based on what works for CRE.
There is more evidence that the Bank values industry support in taking the CRE loan database forward. Its report is sensitive to the need to rectify “data shortcomings at banks”, and notes the challenges around capturing time series data on loan performance, capturing data from unregulated lenders, and protecting the private nature of the market. Overall, this is the kind of regulatory approach business can work with.
And this isn’t only about financial stability. Almost all the market participants I’ve spoken to can see the market benefits of a CRE loan database, even if, for some, worries about cost or confidentiality loom large. In essence, a CRE loan database could bring:
1) Sensible capital requirements (and thus pricing) for banks’ CRE loans. One of the main reasons that UK banks have been forced to “slot” their CRE loans is the poor quality of the CRE lending data on which they tried to build more sophisticated models. Industry efforts, for example by IPD, to collect lenders’ data voluntarily have attracted plenty of interest but proved very hard to get off the ground. A regulatory requirement arrived at through appropriate consultation could be the answer.
2) More (and more sensible) capital into CRE lending. It was striking that, when JP Morgan Cazenove initiated coverage of three listed CRE debt funds last week, they had to resort to data from January 2014 to describe the European CRE debt universe (taken from a CBRE research report). Timely, comparable market-level data would help institutionalise CRE debt as an asset class, attracting better-informed capital to a more liquid and transparent market.
3) More consistent reporting requirements for borrowers. Loan agreements already impose reporting requirements on borrowers, but both lenders’ demands and borrowers’ delivery vary. A consistent reporting template for all lenders should also standardise what they seek from borrowers, reducing compliance costs.
I also want to address one specific objection from several respondents to the Bank’s consultation, namely their view “that the value of quantitative data was low without the associated qualitative information needed for risk management”. This objection might have merit if the purpose of the loan database was to allow individual lending decisions to be made or judged – but that is not its purpose at all.
In fact, the loan database will provide only aggregated quantitative data, to support and complement qualitative analysis of capital flows and market behaviours. Its focus will be not on the individual loan, but on the market as a whole, market segments and sub-sectors of the lending and borrowing universes, and potentially (for the regulator only) some degree of portfolio-level assessment of individual lenders. The database needs granular data inputs so that the bigger picture emerging from it is robust. It should provide quantitative information of a kind currently unavailable to those interested in CRE debt.
The Bank has signalled its intent to explore the database proposal properly. It is time for all of us – enthusiasts and sceptics – to work together so we end up with something as useful as possible.
Peter Cosmetatos is chief executive of the Commercial Real Estate Finance Council Europe
