Real estate finance risk appraisal: lessons from the past

Abstract

History is important — the lessons that each of us can learn from our own experience and that of others before us can always help in formulating our views, opinions and strategies for the future.

A sound and understanding relationship between lender and borrower is essential. The temptation to borrow heavily is all the stronger as interest rates fall and when inflation is low — but it is not so much the absolute level that is the issue, but the overall capacity of net incomes to sustain appropriate debt servicing (interest and amortisation) over time.

Historically, the too heavy reliance of some lenders on the ‘valuation’ has resulted in disaster! The tales of woe and misunderstanding between those who instruct, those who advise and the borrower are legion and the subject of incredulous after-dinner stories. But the desire to put the done deal behind you and pay scant regard to the required and sometimes received management information, tenants schedule, managing agent reports, audited accounts (and anything else that seemed like a good idea to ask for at the time), must be resisted at all costs! It may well be that a lender can be properly satisfied with a direct first legal charge over the property in isolation. However, most real estate loans are not sound enough to do without protection from the actions of others or where the continuing viability of the principals is not important.

Of course, there are enormous and demanding lessons to be found from the past and they can be related to the very different investment and debt markets today. Copyright © 2001 Henry Stewart Publications