Simulating the cyclically adjusted returns to UK property lending
| Date | 02 February 2015 |
| Published date | 02 February 2015 |
| Pages | 66-80 |
| DOI | https://doi.org/10.1108/JPIF-06-2014-0045 |
| Author | Richard Barkham,Malcolm Frodsham |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
Simulating the cyclically
adjusted returns to UK
property lending
Richard Barkham
CBRE, London, UK, and
Malcolm Frodsham
Real Estate Strategies, London, UK
Abstract
Purpose –The purpose of this paper is to provide an indication of the returns to commercial property
lending over the last 30 years in the UK.
Design/methodology/approach –There is no long-term index of the returns to commercial
property lending in the UK. This paper provides a partial solution by simulating the performance of
bullet loans of various vintages, based on the value movements of the IPD index.
Findings –On average over the long-term debt returns are higher than equity returns. However, in
certain periods, the losses incurred by real estate lenders are very large.
Research limitations/implications –No account taken of risk mitigation strategies used by
lenders such as cross-collateralisation.
Practical implications –Provides an alternative approach to that recommended by the recent IPF
“Vision For Real Estate Finance”Document based on the use of ICR. Makes the case for a loan
equivalent of the IPD index.
Social implications –Reduced chance of resource misallocation and recession due to excess real
estate lending.
Originality/value –Very limited information on private real estate debt returns.
Keywords Simulation, Commercial mortgages, Commercial real estate, Default risk,
Real estate debt returns, UK banks
Paper type Research paper
1. Introduction
Public real estate markets are data rich, with high frequency pricing and public
disclosure of financial information for both real estate equities and Commercial
Mortgage Backed Securities (CMBS). Private equity real estate benefits from a long
data series based upon asset valuations. One important area of the real estate
investment universe without high quality returns data is private debt. As debt
collateralised on commercial real estate contributed significantly to the Global
Financial Crisis and to losses to major UK banks and the public purse, more data is
needed on this least transparent, but systemically important, quadrant of the real
estate market.
The majority of UK real estate debt is originated by banks. It is tempting to suggest
that the private nature of these transactions means that meaningful commercial
mortgage return data will never become publicly available. The same statement could
have been made about the private equity real estate 30 years ago, until IPD emerged
to rectify the situation. Given that real estate has been implicated in two very severe
credit crunches in the last 25 years, it is very surprising that the aggregate and
individual performance of real estate lending has not been more systematically tracked .
This is a point argued forcefully in the IPF’s recent “Vision for Real Estate Finance”
Journal of Property Investment &
Finance
Vol. 33 No. 1, 2015
pp. 66-80
©Emerald Group Publishing Limited
1463-578X
DOI 10.1108/JPIF-06-2014-0045
Received 26 June 2014
Revised 4 September 2014
Accepted 9 September 2014
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
66
JPIF
33,1
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