UK: Real Estate Finance − How To Survive The Next Boom And Bust

Last Updated: 19 March 2014
Article by Michael Delaney

Summary and implications

The legacy of the global financial crisis is ever apparent, especially for those working in the real estate finance sector. Although recent factors point to a more optimistic market, there is concern that a return to over-exuberant lending practices could lead to trouble further down the road.

The future of the real estate finance sector was the focus of a report issued by the Real Estate Finance Group in October 2013, A Vision for Real Estate Finance in the UK, put together by representatives from, amongst others, Grosvenor Group Limited, CBRE, Kames Capital Plc, HSBC Bank plc and Aviva Investors. The report contains seven recommendations to help the real estate finance sector survive the next market crash. Landlords, developers, banks and other lenders within the commercial real estate sector may be interested in the proposals. The final recommendations chosen for implementation are expected to be published in a final report in early 2014.

The report's vision

The aim is to promote self-regulation within the commercial real estate (CRE) finance market. Whilst the report recognises that regulation is needed to prevent over-lending, the focus is on minimal intervention. It is suggested that too much intervention by regulators can distort the market, thereby exacerbating any peaks and troughs which are already occurring and compounding damage to financial markets.

The report's main building blocks for the Group's proposals are:

  • better informed market players with access to real-time market data;
  • promotion of self-regulation and good practice;
  • ongoing supervision by regulators before moving to intervene; and
  • graduated intervention applied throughout the market cycle (where needed) rather than short-term interventions.

Key proposals

1. Central loan database

A mandatory database of all UK CRE loans, including real-time risk analysis of lenders' books. The database would be public and therefore available to all lenders, regulators and market commentators to assess the state of the market and raise the alarm when another bubble is growing.

The report recognises that individual lenders and borrowers may be concerned by the public nature of the proposed database and suggests that controls should be put in place to ensure anonymity of the participants.

2. Expert committee

The establishment of a committee made up of senior members of the real estate sector whose role would be to assess the market position and communicate its views to the regulator. This interaction with the regulator would encourage the CRE sector to become more self-regulating.

3. Industry training and qualifications

All key members of real estate lending teams to have an accredited "CRE lender qualification", maintained through continued professional training. For junior members the focus would be on loan and asset training, whereas for senior members it is suggested that the training should concentrate on the risks arising from loans and how market cycles occur.

4. Capital requirements linked to a property's long-term LTV

Loan to value ratios used to assess the maximum amount of the loan (LTV) to no longer be based on a property's open market value at a given time. Instead, it is proposed that the LTV should be calculated using the property's long-term value which will take into account any fluctuations throughout the market cycle and present an overall more accurate value.

The motivation behind this proposal is to prevent over-lending during property booms and the ensuing financial difficulties when property values decrease again.

Bank of England director, Andrew Haldane, has commented in relation to cyclical spirals in the market that "one way to slow that spiral would be to base lending decisions not on spot, but medium-term or sustainable valuations".

5. Better reflect levels of risk arising from loans

Lenders to take steps to better reflect the actual risk arising from each loan and clearly reflect that risk in the capital requirements. This should in turn lead to a greater differentiation in capital requirements (greater capital reserves required for riskier loans) and the discouragement of higher risk loans as a result of more stringent requirements, whilst also incentivising lenders to make lower risk loans.

6. Variety of types of lender

A variety in the types of lender offering credit could encourage a more varied response to any market stresses. The key aim of this proposal is to ensure that during financial dips and the resulting restriction in credit available to borrowers there are still lenders willing to lend and support investment.

Market commentary on these proposals has suggested that non-bank entities such as insurers, large corporates and debt funds could be encouraged to compete as a new type of lender.

7. Automated intervention based on market data

Use market data to alert regulators when the market is growing beyond its cycle average. In order to encourage a consistent approach to regulating the market it is suggested that the presence of certain indicators should always result in graduated action by the regulators intervention to restrain and dampen the market, regardless of whether or not a market crash is actually considered likely to happen.


The voluntary proposals have been put forward to encourage self-regulation of the CRE finance sector and have been warmly welcomed by key organisations in the real estate industry, such as the British Property Federation. The report has also been well received by the regulators, as well as the Bank of England, with the potential undesired outcome that the proposals may be formulated into new regulations – precisely what the group was seeking to move away from.

Provided the proposals are seriously introduced to the market in a manner that does not inhibit real estate lending these changes should benefit all. In particular, borrowers may benefit from a more robust lending area with a variety of credit sources, although changes in asset valuation resulting from calculating long-term LTV could, in the short term, reduce the amount of credit available. However, lenders and borrowers alike should welcome a more sustainable CRE finance market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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