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

Protected Collateral Value: An Approach to Valuation of Commercial Properties for Loan Guarantees AbstractThe 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Real Estate Management and Valuation de Gruyter

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

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Publisher
de Gruyter
Copyright
© 2020 Lutemberg Florêncio et al., published by Sciendo
ISSN
1733-2478
eISSN
2300-5289
DOI
10.1515/remav-2020-0019
Publisher site
See Article on Publisher Site

Abstract

AbstractThe 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.

Journal

Real Estate Management and Valuationde Gruyter

Published: Sep 1, 2020

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