Simulating the cyclically adjusted returns to UK property lending

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.