International Valuation Standards Council
IVSC
The IVSC is a not-for-profit organisation that acts as the global standard setter for the valuation profession, serving the public interest.
ID: 904933634522-65
Lobbying Activity
21 Feb 2022
The CRR Prudent Property Valuation Approach
The International Valuation Standards Council (IVSC) is the independent global standard setter for the valuation profession. The IVSC set International Valuation Standards which promote consistency and professionalism in the public interest.
The subsequent comments address the new prudent property valuation approach enshrined in the proposed CRR amendment (Article 229). This approach was developed by the BCBS within its new Basel III Framework. A research group under the steer of Prof. Neil Crosby (University of Reading) and Prof. em. Aart Hordijk (Tilburg University) with contributions from the IVSC and other valuation professionals assessed the requirements for the transposition of a prudent real estate collateral value in European law (Research Report attached).
In all EU Member States, the traditional property valuation basis used to value collateral assets is Market Value. Some Member States also use a more conservative Mortgage Lending Value approach. Both basis of value have a long history, are well established and underpinned by respective valuation standards and methods. They have therefore been recognized by the CRR since its inception, the definitions being provided by Article 4 points 74 & 76 of the CRR. (Link: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32013R0575&from=DE).
There is evidence that using just the Market Value might have a pro-cyclical effect and lead to a certain potential for the current market price to be above the value that would be sustainable over the life of the loan. However, the prudent value concept as presently designed by Article 229 is not fit for purpose from a valuation practitioner’s perspective.
Any indication necessary for the interpretation of the proposed prudent value or the processing of adjustments to Market Values is missing. On the basis of the current draft, valuers are not in a position to carry out prudent value valuations. Comprehensive market research assessing the availability of the required data and market information would be a prerequisite. Therefore, further guidance at European and/or national levels is needed to develop the appropriate data sources and to provide a framework for the alignment of concepts, definitions and methods of prudent valuation.
Overall, full EU alignment with the Basel III valuation requirements would require some substantial changes to valuation practice in many Member States. Major challenges are market transparency, availability of appropriate long term data, knowledge and experience of valuers. Valuers need to determine the prudent property value drivers and their underlying parameters. Availability of long term data sets at individual property levels is fundamental. This particularly encompasses historic rent levels and capitalisations rates, the development of capital values and risk premia over different market cycles as well as historic vacancy rates and property stock levels. In a number of Member States, such data don’t exist and/or property markets are not transparent enough to develop such modellings and time series.
We therefore recommend that the EU should reconsider the existing regime enshrined in the CRR particularly as the applications of Market Value and Mortgage Lending Value are well implemented, standardised, tested and understood by both valuers and lenders.
IVSC are furthermore concerned that any change in valuation practice at this point in time could unintentionally trigger disruptive effects in valuation practice and cause further financial instability as unlike Market Value and Mortgage Lending Value there is no agreed valuation approach for providing a prudential value and therefore any change of this nature would need to be done in conjunction with valuers in order to have a consistent approach across all European markets.
The IVSC, February 2022
Appendix
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