Global Real Estate Valuation Policy Update: the European Perspective

1. Global Real Estate Valuation Policy Update: the European Perspective • The principle: the EU Treaty does not provide the European institutions with direct regulatory competences for real estate and/or property valuation in the European Union • The financial crisis has shifted power to the EU and made the EU regulator nervous about financial and real estate markets • Areas increasingly subject to valuation law making processes: • Capital Requirements Regulation (Basel III) • Alternative Investment Fund Managers Directive • Mortgage Credit Directive • EU Energy Performance of Buildings Directive

2. The European Capital Requirements Regulation (CRR) • Exposures fully and completely secured by mortgages on property (residential & commercial) enjoy a preferential risk weight = lower capital allocation • The following requirements must be met: • Requirements on legal certainty (enforceable mortgage etc.) • Adequate insurance of the property against damage • Clear documentation • Requirements on property valuation and monitoring of property values

3. Art. 4 par. 74 & 76 CRR provides the following definitions of value: ‘Market Value' means, for the purposes of immovable property, the estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without being under compulsion; ‘Mortgage Lending Value' means the value of immovable property as determined by a prudent assessment of the future marketability of the property taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property;

4. Art. 229 CRR defines the general valuation principles For immovable property collateral, the collateral shall be valued by an independent valuer at or at less than the market value. An institution shall require the independent valuer to document the market value in a transparent and clear manner. In those Member States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions the property may instead be valued by an independent valuer at or at less than the mortgage lending value. Institutions shall require the independent valuer not to take into account speculative elements in the assessment of the mortgage lending value and to document that value in a transparent and clear manner.

5. Art. 208 par. 3 CRR defines monitoring and revaluation requirements of property values • Institutions monitor the value of the property on a frequent basis and at a minimum once every year for commercial immovable property and once every three years for residential real estate. Institutions carry out more frequent monitoring where the market is subject to significant changes in conditions; • The property valuation is reviewed when information available to institutions indicates that the value of the property may have declined materially relative to general market prices and that review is carried out by a valuer who possesses the necessary qualifications, ability and experience to execute a valuation and who is independent from the credit decision process. For loans exceeding EUR 3 million or 5 % of the own funds of an institution, the property valuation shall be reviewed by such valuer at least every three years • Institutions may use statistical methods to monitor the value of the property and to identify property that needs revaluation.

6. The EU Alternative Investment Fund Managers Directive AIFM • In its Art. 19, the AIFM Directive provides extensive rules on valuation and competence of valuers: • A proper and independent valuation of the assets of the AIF must be performed in accordance with the applicable national law and the AIF rules or instruments of incorporation. • The assets have to be valued on the basis of the net asset value per unit or share to be calculated at least once a year • The rules applicable to the valuation of assets and the calculation of the net asset value shall be laid down in the law of the country where the AIF is established • The valuation function is either performed by: • an external valuer, being a legal or natural person independent from the AIF, the AIFM and any other persons with close links to the AIF or the AIFM; or • the AIFM itself, provided that the valuation task is functionally independent from the portfolio management and the remuneration policy

7. The EU Alternative Investment Fund Managers Directive AIFM • Where an external valuer performs the valuation function, the AIFM shall demonstrate that: • the external valuer is subject to mandatory professional registration recognised by law or to legal or regulatory provisions or rules of professional conduct; • the external valuer can provide sufficient professional guarantees to be able to perform effectively the relevant valuation function • the appointed external valuer shall not delegate the valuation function to a third party. • AIFMs shall notify the appointment of the external valuer to the competent authorities of their home Member State which may require that another external valuer be appointed instead where certain conditions are not met • The valuation shall be performed impartially and with all due skill, care and diligence.

8. European Mortgage Credit Directive • In its Art. 14a and related recital, the Directive provides a full set of valuation rules • Member states shall ensure that reliable property Valuation standards for mortgage lending purposes are developed within their territory. Member States shall require creditors to ensure that those standards are used where they carry out a property valuation or to take reasonable steps to ensure that those standards are applied where a valuation is conducted by a third party. • Member states shall require that internal and external appraisers conducting property valuations are professionally competent and sufficently independent from the credit underwriting prcess so that they can provide an impartial and objective valuation, which shall be documented in a durable medium and a record of it kept by the creditor

9. European Mortgage Credit Directive • The recital stipulates that • „it is appropriate to require Member states to ensure that reliable Valuation Standards are in place, for example through legislation or self-regulation • in order to be considered reliable, valuation standards should take into account internationally recognised valuation standards, in particular those developed by the International Valuation Standards Committee, the European Group of Valuers’ Associations or the Royal Institution of Chartered Surveyors….”

10. EU Energy Performance of Buildings Directive • The Directive requires Member States to establish • Integrated energy performance standards based on both the thermal characteristics of each building and its renewable energy systems • Energy performance certificates (EPC) • The valuer • has to assess the relevance of the EPC and the impact of energy efficiency issues on the valuation of property • i.e. has to take account of the energy efficiency rating of the building and EPC recommendations so far as relevant in providing his opinion as to the value of the property on a recognized basis of valuation