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Protected Collateral Value: An Approach to Valuation of Commercial Properties for Loan Guarantees

Author

Listed:
  • Florêncio Lutemberg

    (Real Estate Research Group University of São Paulo – São Paulo – Brazil)

  • de Alencar Claudio Tavares

    (Real Estate Research Group University of São Paulo – São Paulo – Brazil)

Abstract

The valuation of commercial properties for the guarantee of loans is extremely relevant for financial institutions, since it directly impacts the calculation of the loan to value ratio (LTV). However, despite the vast literature on the subject, the choice of methodological basis and the definition of the type of value to be employed are not pacified issues among researchers and practitioners. In this sense, the main objective of this paper is to present a methodological approach, as well as a suggestion of the type of value for the valuation of commercial properties bound collateral.The main methods and types of values related to the valuation of bound collateral commercial properties are presented below. Next, we propose a refinement of the income method, based on the concept of the value of the investment opportunity and under the principle of value at risk. Finally, we promote a case study with data from the Brazilian market to illustrate the application of the proposed approach.Based on the case study, it was evidenced that the valuation approach proposed in this paper, anchored in the potential of the income generation of the property, reduces the risk of exposure to banks’ credit.

Suggested Citation

  • Florêncio Lutemberg & de Alencar Claudio Tavares, 2020. "Protected Collateral Value: An Approach to Valuation of Commercial Properties for Loan Guarantees," Real Estate Management and Valuation, Sciendo, vol. 28(3), pages 1-11, September.
    • Handle: RePEc:vrs:remava:v:28:y:2020:i:3:p:1-11:n:1
    DOI: 10.1515/remav-2020-0019
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    References listed on IDEAS

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    More about this item

    Keywords

    Valuation; Commercial property; Loan guarantee; Loan to value; Income approach; Value at risk;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O22 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Project Analysis

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