IPF Long-term Value Methodologies in Commercial Real Estate Lending (July 2020) Full Report
This study reviews and builds on the Property Industry Alliance’s Long-term Value Working Group’s 2017 Report, Long-term value methodologies and real estate lending, The aim of the IPF research was to identify a long-term value methodology (or methodologies) that could be used effectively by lenders and regulators to guide commercial real estate (CRE) lending-related decisions and, thus, reduce the risks associated with CRE lending, particularly at times of extreme market overvaluation.
No model of commercial property can provide a completely reliable estimate of long-term fair value due to constraints such as the limited number of UK property cycles in the data used and as structural changes are occurring in specific property sectors. However, the main recommendation of this research, which will be of value to both lenders and investors, is that a long-term valuations model, based on econometric models of sustainable rent and cap rates, provides a useful indicator of overvaluation in the UK commercial property sector, effectively warning when cap rate compression or rental growth assumptions are excessive compared to history.
Comprehensive appendices and a summary report are also available to download from the Resource Library.