Simulating the cyclically adjusted returns to UK property lending

In: Journal of Property Investment & Finance, Band 33, Heft 1, S. 66-80

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.