Bank lending valuations on commercial property – Does European mortgage lending value add anything to the process?

Abstract

This paper reviews a number of alternative bases of valuation which can be applied for lending purposes. In early 1999, the European Mortgage Federation suggested that the philosophy of a European Mortgage Lending Value (EMLV) should be based on “sustainable” values and this recommendation is compared to the current basis used for bank lending valuations, mainly market value. This comparison is of both concepts and applications. In addition, concepts and applications of worth valuations are considered. The paper concentrates on commercial property but many of the principles also apply to residential property valuations. The paper concludes that the EMLV concept of sustainable values is itself unsustainable. There are a number of reasons for this view, not least that the concept itself cannot be closely defined and will be interpreted differently by those who apply it. It lacks the objectivity of market value and the rationality of concepts of worth. The paper also questions whether any concept of value can apply over a period of time and suggests that all other “values” do not have a shelf life and relate to one specific point in time only. In application, in the absence of any meaningful conceptual basis, sustainable value appears to have been applied as a conservative market value. It may give the illusion of having some extended time horizon attached to it but this is the major danger. The reality is that it is just another product of the endless search for a single valuation figure which can give lenders the holy grail of longer‐term protection from lender default. This it will fail to do as all other bases applied so far to lending valuations have done. The recommendations of this paper are that all European institutions and valuer/appraisers resist this latest incursion into the fruitless search for the perfect loan valuation basis and concentrate on the other aspects of the valuation which can truly help lenders make their decisions. These are the economic, property market and occupier issues which should be considered by the appraiser and included as major items in valuation reports, many of which would be explicitly included in a full discounted cash flow approach to commercial property loan valuations.