Professional Insights: Property collateral valuation – from independent valuers to bank-led governance

IVSC Professional Insights

More than two years ago, the Head of Real Estate Finance at Banque Populaire Rives de Paris, in a reflection piece entitled ‘Expertise ou évaluation des actifs immobiliers’, described the scrutiny and steering of property collateral valuations as ‘a central issue’, albeit not yet a mandatory one. Since then, changes to international rules have turned a bank’s oversight of collateral valuation into a matter not only of best practice, but also of compliance.

As Yannick Lucotte points out in a recent prudential note (Valuing Property Collateral in the Era of Climate Risk: Towards a New Doctrine, June 2026), property collateral valuation is entering a new phase, driven by stronger European prudential requirements, the integration of ESG factors and the rise of climate risks.

For banks, the question is therefore no longer only which value is adopted, but how it is produced, reviewed and incorporated into the lending process: who produces the valuation, with what competence and with what degree of independence?

Independent Valuers: Necessary, but Not Sufficient

The EBA Guidelines, applicable since 30 June 2021, established a framework under which a bank’s responsibilities extend far beyond simply instructing an external valuer. At loan origination, the property’s value must be determined by an internal or external valuer. Where certain simplified procedures are permitted, the valuer remains responsible for the valuation and must understand the data and assumptions underpinning it. Banks using external valuers must also establish a panel of approved valuers with the necessary expertise in the relevant property segments. The EBA goes further still: valuations must be impartial, clear, transparent and objective, and accompanied by a report that enables the bank to understand the key factors and parameters underlying the value adopted.

Crucially, a bank cannot merely be a passive recipient of the valuation. It must carry out its own critical review of the proposed value, considering in particular whether the approaches and assumptions used are intelligible and prudent, and whether the comparables selected are reasonable.

CRR3, which implements the final phase of the Basel III reforms in the European Union, reinforces this principle at regulatory level by requiring valuations to be performed by independent valuers with the necessary qualifications, skills and experience, who are independent from the credit decision process.

Valuer independence is a necessary condition, but it is not sufficient on its own.

The prudential rationale is clear. Banks must manage the selection of their valuers, ensure their competence and independence, and also retain the ability to understand and challenge the valuations submitted to them.

From Valuer Independence to Bank-Led Valuation Governance

The issue is therefore no longer simply the independence of the valuer, but the bank’s own governance of the valuation process. This issue has become particularly important with the finalisation of Basel III and its European implementation through CRR3. The Exposure-to-Value (ETV) ratio now plays a central role in the prudential treatment of exposures secured by real estate property under the standardised approach. The ability to obtain robust, consistent and up-to-date valuations is therefore directly linked to risk assessment and the resulting own funds requirements.

In Europe, the EBA Guidelines require property collateral to be valued in line with international standards and cite the International Valuation Standards (IVS) by name. With CRR3 now linking capital requirements to the ETV ratio, the quality of that valuation matters more than ever.

The competence expected of a bank is not to produce a counter-valuation, but to be able to question the valuation it receives from the valuer. This means giving non-specialists the means to form an informed view of the value presented to them.

Questioning a Valuation Without Redoing It

Banks must therefore be able to rely on tools that generate objectively derived benchmarks, allowing them to check whether a value proposed by a valuer deviates excessively from those benchmarks. However, solutions based solely on cash-flow methods (discounted cash flow or income capitalisation) are poorly suited to this purpose:

• they require estimates of a large number of variables, both current and forward-looking;
• they do not formally establish the relationship between the physical characteristics of a property and its value;
• they are highly dependent on the assumptions adopted – such as future rents, vacancy rates, discount rates and exit yields – and therefore do not necessarily provide a benchmark independent of the original valuation.

By contrast, so-called ‘integrated valuation’ solutions, which formally link value to asset quality, can generate objectively derived benchmarks in a straightforward and robust manner.

These benchmarks are the outcome of a logical sequence in which each valuation stage follows systematically and formally from the preceding one:

1. analyse demand to understand what the market expects from a building and its location;
2. translate market demand into a quality assessment model that can be applied to buildings of the same property type;
3. establish, for each market, the statistical relationships between quality levels and rental levels;
4. derive, in the same way, the relationship between quality and value.

This approach can be used not only at loan origination but also to revalue the collateral securing existing loans in the portfolio. Because it links assets’ physical characteristics to their value, it also makes it possible to analyse exposure to natural hazards and carry out stress tests.

What Comes Next

This paper forms part of a series by the authors aimed at risk and compliance managers who must translate changing regulatory requirements into defensible and traceable risk-management practices, while keeping costs and time spent from spiralling. Forthcoming articles will address the practical implications of each of these regulatory developments for new lending, the monitoring of the existing portfolio and prudential reporting, together with the methodological solutions available.

Readers wishing to explore this topic further are invited to contact the authors.