Uncertainty in lending to commercial properties : How do the banks handle and minimize the risks and uncertainties when lending to commercial properties?

Abstract Student thesis in Business Administration, Karlstad Business School, Real Estate Management Bachelor thesis, Spring 2019 Supervisor: Peter Samuelsson Authors: Anders Bergström and Simon Svensson Title: Uncertainty in lending to commercial properties – How do the banks handle and minimize the risks and uncertainties when lending to commercial properties? Introduction and problem statement: Valuation and lending to commercial properties are associated with risks and uncertainties. Since the banks base their lending on the basis of valuation, incorrect values are risky for the banks as well as for macroeconomics at large. Research question: How do banks view risk/uncertainty when valuing and lending to commercial properties? How do banks manage and minimize the risks/uncertainties of lending to commercial properties? Objectives: The purpose is to investigate and describe the risks and uncertainties that banks encounter and how they handle them when lending to commercial properties. Limitations: Our study focuses on four banks in Karlstad who work with lending to commercial properties. Methodology: We have applied a qualitative method where we interviewed four people operating in the banking sector, working on lending to commercial properties. The main purpose of the interviews is to investigate how the banks work with risk minimization and management of uncertainties in lending to commercial properties. Conclusions: The banks follow the regulations and the various tools they have to minimize risks and uncertainties when lending. The valuation data is only verified by internal checks carried out by bankers who are not authorized valuers. The bank thus relies on the valuers data and does not review the valuation data as thoroughly as the valuers. In practice, this means that the bankers cannot always detect if a valuation basis is incorrect, but risk to grant the loan anyway