Most of the public walking down the street have little understanding of how the property that surrounds them was created. Like a garden shed the general view is that you go somewhere and buy it, blink and it appears. Little thought is given to the fact that property accounts for about 70% of the world’s worth and is one out most important factors of production with the property and construction industry accounting for some 11% to 13% of UK GDP.
Like most things in life, to create something you need money and with these credentials property needs a great deal of it. How property is financed is one of the key factors in the life of the person walking down the street although oblivious to the activity that is the property market. Every UK and World recession/downturn since 1974 has either been the result of, or the cause of an overheated property sector and crash.
The second of our Open Hall lunches at Haberdashers Hall on the subject of “Banking, property, lending and valuation — do they go together?” attracted an audience of just under 100. They were treated to a high level and incisive view on the activities of banks and how property is valued by Chris Sullivan, recently retired Deputy CEO of RBS and Michael Brodtman, Head of Valuation at CBRE.
Chris Sullivan described his experiences of banking behaviour in lending on property through his experiences since joining Nat. Wes.t in 1973 and was frank and fair in his analysis. He wished there had been a stronger dialogue between the banks and the property/valuation profession 15 years ago as that might have helped limit the excesses. As it happens, banks became greedy and with few checks in place forgot their purpose was to lend against secured assets with the borrower having an the ability to repay. Instead the banks became equity players with disastrous consequences.
Michael Brodtman felt the valuation and banking sectors had been well aligned over the past 5 years but that there was much more that could be done in supporting stability and sustainability in property lending. One idea would be to take the IPD valuation model and every quarter benchmark lending levels and loan to value ratios so as to determine a line of travel and help assess peaks and breaking points for forecasting purposes. This would add to the armoury of both lenders and values undertaking the equivalent of a health on the property market, the level of finances employed and the risk factor it attracts.
As this was a business lunch, time was tight but Damian Wild, Editor of the Estates Gazette very kindly delayed his flight to Japan to chair the debate and kept the momentum going for over half an hour. He questioned how banks operated, what skill base do they have to deal with the sophistication of property and questioned the transparency and effectiveness of the valuation profession to which both Chris and Michael responded positively that much had been learnt and acted upon. However, all agreed there are no guarantees on the future and markets do not operate without risk and uncertainty.
The brief sound bite summary from our two lunches on the subject of “Banking, property, lending and valuation is as follows:
Mike Hussey: The lending and valuation cycles in banking and property have only been slighted in 3 of the past 30 years.
Peter Wynn Rees: Don’t trust a bank with property or a developer with money.
Chris Sullivan: Banks must stick to lending and not become equity players and listen more to Valuers.
Michael Brodtman: We need to have better financial modelling and benchmarks in place to assist with market travel and lending performance/security.
Despite all this understanding those walking down the street will continue to be oblivious to what the property around them means but if it gives them a home and a place to work why should they bother — that is our job and responsibility. Quite rightly the public, business and government expect us to get it right. Clearly we can do better but the lessons have been learnt and understood by all those involved in property. The question is can we remember the lessons and the pain?
I am most grateful to the 220 Liverymen and guests that have attended both Open Hall Lunches, Amanda Jackson for her organisation, Steve Hilton of Redwood Consulting for bringing together the speakers and Chairman on the day and Haberdashers Hall for their excellent carvery lunch and splendid surroundings in a modern business like setting.
Graham F. Chase Master