Simulating the cyclically adjusted returns to UK property lending. Issue 1 (2nd February 2015) - Barkham, Richard
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.