The commercial property sector seems to run in a boom-bust cycle and has done so for generations, however the Bank of England and leaders in the commercial property sector have devised a metric which they are urging lenders to utilise. The tool works with the factor of boom-bust which should make these peaks and troughs in the market diminish or vanish.
Commercial property developers have encountered enough ups and downs to know that the more stable scenario offered via this new metric is not only welcome but vital to prosperity. Consistency is key.
The Financial Times has asserted that the metric is based on adjusted market value rather than the loan to value ratios based on current property value method which lenders use heavily at present.
As the publication illustrated, every 15-20 years the commercial property market experiences a boom followed by an equally jaw dropping bust, therefore it is more predictable than many believe. The lenders weak system for evaluating risks and attributing loans is the defining issue.
Commercial property escalates, increases pressure on lenders to loan money and this encourages more business and raises prices based on supply and demand. Properties become overvalued using the loan to value and current property prices tool and this leads to an inevitable bust because prices are too high so demand drops dramatically.
You can see why the volatility of the commercial property market can be attributed to the present practices and lack of ability to forecast the future and risks, so the metric should prove to be a positive change.
The Bank of England feels that another crash will occur if measures aren’t enforced. London office properties offer a prime example of “stretched” values. The metric is the solution put forward to bring values and reality more in line.
The adjusted market value metric takes the past and current prices, inflation and long-range trends in to consideration. The metric also suggests that current commercial property prices are overvalued by around 10% and the market could fall by up to 20% in the next 5 years.
Commercial property investment advice already utilises long term potential to a degree but if the BoE and industry constructed metric works as it is intended to, this will make property consultancy and lending easier because there will be a solid measurement and data to work with.
John Parkinson and his team are specialists in this field. He has forty years of experience in property construction and development in the UK and overseas. He managed and owned a construction and development company for 25 years and he has witnessed the pitfalls, obstacles and critical factors in commercial property so seeking his investment advice and more information about this new metric is beneficial.
He works alongside the Thames Valley Business Advisors to assist entrepreneurs, SME’s and corporations across the Thames Valley, London and the south east.
Via this metric, we should see an end to the rollercoaster activity which will offer peace of mind and authority across the sector.