Commercial Property Values Fall

Apparently, commercial property values here in the UK fell in the month of July 2016 by an average of 3%. So, does a drop in value have any implications as far as commercial lending is concerned?

Following the drop in commercial property values in July 2016 we briefly consider if this will impact on lenders
Will the fall in values on commercial properties impact on lending propositions?

Well, when you apply for the likes of a commercial mortgage, the lender will require a professional valuation of the premises that you wish to offer as security. This is usually the property that you are intending to buy with the assistance of some form of finance.

When the lender underwrites the lending proposition it will look at the forced sale valuation of the premises in question and consider lending a certain percentage of this valuation. The forced sale valuation is an indication as to how much the property could be sold for within a reasonable short timescale should the lender have to repossess the property. That percentage figure may vary between lenders but could, in some instances, be in the region of 80%. When making such an assessment it will want to make sure that its risk of loss is as low as possible. Therefore, in a normal set of circumstances, you would expect that the lenders exposure to loosing any money is low.

One would have thought that if commercial property values were only to suffer a 3% reduction in value just for one month and that in subsequent months the market leveled out with no change in values that a lender was not at risk. There may be a problem if, for instance, property values continued to fall each month by let’s assume a similar percentage as the drop seen in July.

It will be interesting to see if lenders become more cautious in the coming months in respect of their underwriting of commercial mortgages to businesses due to the drop in values seen in July on commercial property.

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