Prudential Valuation for Real Estate
- EU implementation deadline approaches
- UK PRA published second near-final policy statement
Further to the publication of our statement on “Prudential Property Value: Our Efforts to Ensure Transparency and Consistency” in July 2023, following continued discussions and outreach with key stakeholders, IVSC members and stakeholders are advised that from the 1st January 2025 the requirement to provide a Property Value for secured lending within the EU will be implemented.
The final text for implementing the Basel 3.1 definition into the new Article 229(1) Capital Requirements Regulation (CRR) has been approved by the Council and European Parliament and can be summarised as follows:
The valuation of immovable property shall meet all of the following requirements:
(a) the value is 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:
- the value excludes expectations on price increases;
- 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;
(c) the value is documented in a transparent and clear manner;
(d) the value is not higher than a market value for the immovable property where such market value can be determined;
(e) where the property is revalued, the property value does not exceed the average value measured for that property, or for a comparable property over the last six years for residential property or eight years for commercial immovable property or the value at origination, whichever is higher.
For the purpose of calculating the average value, institutions shall take the average across property values observed at equal intervals and the reference period shall include at least three data points.
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Meanwhile in the UK, on 12 September 2024 the Bank of England Prudential Regulation Authority (PRA) also published the second near-final policy statement and rules covering the implementation of Basel 3.1 standards for credit risk, the output floor, reporting and disclosure requirements in response to consultation paper CP16/22. The near-final policy statement is relevant to all PRA-regulated banks, building societies, investment firms and financial holding companies.
Of particular importance to professionals involved in the valuation of real estate collateral in this release was the following:
Prudent valuation criteria
2.231 The PRA agrees with respondents that the proposed requirement to adjust a valuation to reflect the value of the property that would be sustainable over the life of the loan could be complex for firms to operationalise and may lead to inconsistent approaches. Having considered the responses, the PRA has amended its draft rules to remove this requirement.
Use of automated valuation models
2.232 In response to comments related to the use of automated valuation models (AVMs), the PRA clarifies that it did not intend to propose that only physical valuations by a qualified surveyor would be permitted and has amended the draft rules to state that firms can use robust statistical valuation methods. This may include the use of AVMs or indices, where it is prudent to do so.
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Implementation and next steps
To support a smooth implementation of the package and having considered feedback from the consultation as well as the implementation timelines of other jurisdictions, the PRA has decided to move the implementation date for the Basel 3.1 standards by a further six months to 1 January 2026 with a four-year transitional period ending on 31 December 2029.
As such, valuers should be acutely aware of the current divergence in regulatory settings within Europe when dealing with prudent valuation concepts.
Valuers should note that at this point in time there is no agreed interpretation of the definition, nor an agreed implementation methodology, for Property Value or Prudential Value. Each European country may have their own interpretation and requirements for implementing Property Value within the EU, with the UK implementation now expected to follow on 1 January 2026.
Any professionals being engaged to undertake assignments relating to a prudential valuation concept should be acutely aware of the different authoritative requirements that may exist, and seek clear guidance from relevant regulatory and authoritative bodies before accepting such assignments.
The IVSC will continue to closely monitor prudential valuation concepts and will endeavour to keep our stakeholders informed on any future developments. Please send any comments or feedback in relation to this issue to IVSC Standards Director, Alexander Aronsohn at: [email protected].
List of EU countries subject to Property Value from 1st January 2025:
Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden.