Regular valuations and risk management analysis should be adopted by lenders in the wake of the global financial crisis, according to a new report.
CBRE’s and the IPD’s Lending with confidence: best practice in the analysis and reporting of commercial real estate risk urges the introduction of a fresh set of tools to manage new and existing lending to reduce potential losses.
It says that working in co-operation with lenders, the IPD benchmarking model that has been developed by the investment community could be extended to the banking industry as a sector-wide commercial product. This would require banks to carry out quarterly valuations of the assets underpinning their whole loan books, and consider long-term sustainable yields when originating new loans.
The report is set against the background of increased reporting requirements introduced by a new regulatory regime – including Basel III, slotting, Solvency II and AIFMD – and a freshly confident lending market. It also follows the publication of the Real Estate Finance Group’s draft A vision for real estate finance in the UK paper in October last year.
CBRE valuation executive director Nick Knight, who worked alongside Michael Brodtman on the report, says it deliberately echoes some of the recommendations of the Vision paper, including the creation of a loan database, because “it wanted to contribute to the industry-wide discussion” on strengthening commercial real estate lending.
A longer version of the draft Vision paper is to be published later this quarter.
Top recommendations
? Managers of loan portfolios need data to understand the risk characteristics of the underlying real estate markets and assets types on which they are lending
? Robust valuation regimes are required to support more sensitive risk monitoring
? Information which objectively qualifies the relative quality of assets in relation to the market will help lenders assess the additional downside risk of secondary assets
? More detailed and standardised measurement of cashflow risk will help lenders understand the implications of falling lease lengths
? To attract and retain additional sources of capital, in particular institutionally backed funds, there is a need for robust market data, and more robust valuation regimes, in relation to the risk and return of CRE loans
? Analytical tools and services currently available can help organisations involved in lending – in many cases on the same property assets – make rapid progress towards more robust risk management
bridget.o’connell@estatesgazette.com
