Valuation Criteria under Capital Requirements Regulation

Prudently Conservative Valuation Criteria under the Capital Requirements Regulation (CRR) Krzysztof Grzesik REV FRICS Past Chairman TEGOVA TEGOVA GENERAL ASSEMBLY Brussels 19thOctober 2024

New Valuation Basis Under Revised Capital Requirements Regulation Addition to Article 4 (74a) property value means the value of immovable property determined in accordance with Article 229 (1)

REVISION TO ARTICLE 229 CRR Valuation principles for eligible collateral other than financial collateral 1. The valuation of immovable property shall meet all of the following requirements: (a)the value shall be appraised independently from an institution s mortgage acquisition, loan processing and loan decision process by an independent valuer who possesses the necessary qualifications, ability and experience to execute a valuation; (b)the value is appraised using prudently conservative valuation criteria which meet all of the following requirements: (i) the value excludes expectations on price increases; (ii) the value is adjusted to take into account the potential for the current market value to be significantly above the value that would be sustainable over the life of the loan; (d) the value is not higher than a market value for the immovable property where such market value can be determined

Guidance to Valuers Prudently Conservative Valuation Criteria (i). the value excludes expectations on price increases; Exclusion relates to asking prices in the property market or forecasts at the date of valuation but which may be higher than supported by market evidence immediately prior to the valuation date The valuer should not reflect any such expectation of an increase in sale prices in the future and rising trends should not be forecast beyond the valuation date.

Guidance to Valuers Prudently Conservative Valuation Criteria (ii) ii) the value is adjusted to take into account the potential for the current market value to be significantly above the value that would be sustainable over the life of the loan; An adjustment to be made to the market value to reflect the potential of it being significantly higher than the value that would be sustainable over the life of the loan. Alternatively the adjustment should be made to the value adjusted under criteriumi) Independent valuer advised to undertake an analysis of the market in the context of its cyclicality. If at the date of valuation the market is at its peak, there is likely to be a risk that the market value will be higher than that which couldbe sustained over the term of the loan. By contrast, if the market value is assessed when the market is at the bottom of the market cycle, there is probablylittle such risk. In addition, all other known factors should be taken into account including effects of the EU Green Deal laws. Independent valuer to rely on his professional judgement, local market experience and all available credible evidence.

Position of European Mortgage Federation Coalition (Sectoral Paper on Operationalising the Property Value 28 June 2024) A coalition comprising EMF/ECBC, AEV (Spain), ASSOVIB (ITALY), CREFC Europe, European AVM Alliance and RICS What: The adjustment mechanism should apply to all market segments and related property types How: The adjustment should be determined at an aggregate geographical, market segment and property type level based on relevant observable market data, taking account of market structure, practice and volatility, to identify whether current market values are above long-term trends, thus providing evidence of the adjustment to market values which would be appropriate. Who: The aggregate-level adjustment should be determined by, for example, an independent entity within a financial institution, a well-established and independent authority or organisation or an independent valuer, or another appropriate well- established and independent body, with national market oversight and access to relevant market data.

The Position of Many Lending Banks Many lending banks consider that the adjustment to market value under Article 229 should be undertaken internally by the lending bank based on internal market data, a position supposedly supported by the European Central Bank in a Supervision Newsletter dated 14thAugust 2024 titled Commercial real estate valuations: insights from on-site inspections and the following comment: This change does not imply that a completely new valuation approach is needed, but it does introduce key new requirements to ensure a prudent and conservative value assessment. The requirement for an independently determined market value remains. The CRR further requires lending institutions to maintain data on markets as part of their risk weighting process and to monitor property values to determine if they have materially declined compared with general market prices. The revised wording of Article 229 of the CRR effectively indicates that these data should be used to consider whether the market value should be subject to a haircut.

Advice to the Independent Valuer in Determining Property Value under Article 229 CRR Don t agree with or sign up to any advice or imposition from above without receiving and reviewing all the purported market evidence and data

THANK YOU ! www.tegova.org