As published in Green Street News on 10 April 2025 

Hollis’ Mark Hampson and Interpath’s David Pike discuss Gateway 2, valuations and more

There has been a proliferation of new lenders operating in Europe over the past decade. Although diverse pools of available capital looking for homes is great for borrowers, has it created a situation where saturation has led to a fall in technical due diligence in the rush to secure deals? And further, might this have the capacity to create complications in any future refinancing or restructuring situations?

The answer is potentially yes, according to Mark Hampson, chief commercial officer of consultancy Hollis and Dave Pike, head of Interpath Advisory’s London restructuring group.

The duo talked Green Street News through the issue, along with insight into Gateway 2 log jams, the need for enhanced valuation methods and data room usage.

Has more lenders led to a decrease in due diligence standards? If so, why?

Dave Pike (DP): Over the past decade, the property lending industry has seen significant shifts, leading to lenders and valuers facing ever-more complex challenges than before. In addition to this changing landscape, the number of lenders operating in the same markets has increased. Interpath estimates that around 2015, there were only four or five clearing banks dealing with the majority of properties. Now, there are upwards of 40 – each trying to cover more ground with smaller, more competitive deals.

“The saturation of the market has led to a decrease in the standards of technical due diligence”

Mark Hampson, Hollis

Mark Hampson (MH): We have seen first-hand how this saturation of the market may have led to a decrease in the standards of technical due diligence being performed. As such, banks are exposed to greater risk. Hollis has noted that several high-profile recent deals have highlighted the issues in accurately valuing assets. While the loan sizes for these properties have grown significantly, their value often doesn’t align with the necessary capex costs in order to make them worthwhile.

How are lenders falling behind the curve?

DP: I don’t know about falling behind the curve, but understanding the value drivers in particular real estate subsectors, as well as having a solid grip on the underlying asset, is definitely getting more important. On the whole we have seen some great projects funded, but we have also seen the odd cold caught.

Changes in established valuation practices and comparison to the results of investment appraisals on transactions or price discovery exercises are areas where we have seen significant scope for some real valuation surprises.

Traditional valuing methods, such as a red book valuation, have taken a back seat in recent years due to its largely backward-looking references points and requirements for a solid set of comparable transactions (and where there have been few) to be most relevant.

Funders are acutely aware of this, and we see an increasingly robust assessment of how values now stack up. There is the cost approach, where the value of the property is based on the cost to replace, correct, or reproduce part or all of the property. This is particularly prevalent if assets are falling foul of new regulations.

Then there is the income approach – when value is determined by the property’s potential to generate future income, typically using net operating income (NOI) and cap rates – which is now used frequently in commercial and rental units.

“A more tailored approach to asset valuation has become a necessity”

Dave Pike, Interpath Advisory 

However, you blend the use of other valuation approaches – such as income or cost approach methodologies. They are ultimately all inputs into a calculation of estimated return on capital.  This is most commonly approached through a discounted cashflow calculation and assessments of net present value.

Significant capex spend is something which is material to such an appraisal outcome, and as technical due diligence issues become more prevalent, a more tailored approach to asset valuation has become a necessity to succeed in the industry.

It is also important to understand how the asset monetises and generates the cashflows, to both service and amortise their debt.  How dependent on asset management and market movements are those outcomes, and the ability to be refinanced if desired.

How challenging is Gateway 2? What can lenders do to address the delay issues?

MH: Following the Grenfell Tower fire in 2017, various reforms were proposed to the government – one of them being a new Building Safety Regulator, or BSR. The BSR in turn requires a number of “gateways” to be passed for new developments. The most problematic of these gateways is Gateway 2 – which Hollis estimates to take at least 50 weeks to pass. Currently, there are 122 schemes halted at Gateway 2 awaiting approval.

This has severely impacted new developments and has created an environment where banks are shortcutting wherever possible, to minimise capex as much possible. A further issue for the three gateways is the lack of guidance from the BSR. If an application is denied, there is no feedback to inform on what has gone wrong and what needs correcting – it is a simple yes or no. With structured technical due diligence advice, this problem can be negated and potentially years can be saved.

How can lenders improve their approach to due diligence?

DP: Further to this, data rooms are another aspect that has long been utilised but not maximised to their full potential. Data rooms enable lenders access to a full view of a property – being able to see vital information regarding its condition, financial performance and warning against future costs. As the industry becomes driven more and more by data insights, it is imperative that lenders look to ensure they have a complete data-driven approach – fuelled by extensive technical due diligence.

“It is becoming increasingly important for lenders and valuers to take a more technical and detailed approach”

David Pike, Interpath Advisory

MH: Hollis utilises tools such as this to develop cost plans ranging from one to 10 years, which is crucial in a market where buyers are not focused currently on the long term. This forward-thinking approach allows lenders and borrowers to be fully informed of any capex that they may be exposed to in the future, as long-term prescient thinking is key in a market beset by technical and economic roadblocks.

DP: While the property lending market continues to evolve, it is becoming increasingly important for lenders and valuers to take a more technical and detailed approach to assessing opportunities and risks. Whether this refers to future maintenance costs, fire safety or future-proofing against potential market fluctuations in the future, having a keen grasp of the risks involved can help ensure a decision-making process that is watertight. A proactive strategy such as this will enable lenders and borrowers to work together to mitigate any potential exposure they have.