VALUATION COMMITTEE MEETING BRUSSELS 30 th of October 2015 Draft Minutes

List of Participants VALUATION COMMITTEE MEETING BRUSSELS 30 th of October 2015 Draft Minutes Mr. Ákos Fischl Ms. Marie Lund Bendtsen Mr. Ebbe Røjgaard Mr. Wolfgang Kälberer Mr. Jörg Quentin Mr. Raimondo Lucariello Mr. Luis Varandas Ms. Yvonne Vitikan Mr. Jonny Sylven Ms. Silvia Cappelli Mr Adrian Vascu Secretariat Ms. Jennifer Johnson Ms. Marie Louise Andersen Mr. Paolo Colonna HU (Chairman) DK DK DE DE IT PT RO SE ASSOVIB ANEVAR EMF-ECBC EMF-ECBC EMF-ECBC 0. Chairman s Welcome The Chairman welcomed delegates. 1. Minutes of the Last Meeting of the Valuation Committee on 24 th of April 2015 The Secretariat explained that the Minutes of the last Valuation Committee Meeting held on the 24 th April 2015 had been approved in written procedure. This item was on the agenda for information only. 2. European Commission Consultation on Covered Bonds The Secretariat delivered a presentation outlining the main features of the European Commission Consultation on Covered Bonds and highlighting the property valuation elements of the Consultation. In relation to the latter, W. Kälberer commented that any property valuation related measures in any future Covered Bond specific legislation should be in line with the CRR in order to maintain preferential risk weights. The reference to statistical methods should be treated from a principle-based point of view, and remain in the hands of national authorities to determine which statistical methods are appropriate. Human control of the output remains crucial and should not be regulated at an EU level. S. Cappelli noted that ASSOVIB has an interest in the role of the valuer in relation to the requirements put forward in the Consultation Paper, particularly in relation to revaluation. W. Kälberer highlighted the interpretation issues in relation to the revaluation requirements, for example, the definition of material decline. He noted that Bafin had provided some guidance but that the interpretation might not 1

be the same everywhere. Also, he raised the question of what is revaluation: a new report or a simple screening. E. Røjgaard stated that Danish authorities have very strict regulation. For example, as a minimum requirement they look into the rental potential of every property. He was of the view that the system should not change. W. Kälberer highlighted that Article 209 (3) of the CRR provides some guidance on professional qualifications which the EMF-ECBC could build on. The valuation profession is not defined anywhere. R. Lucariello agreed that there should be alignment with the CRR. There should be no further harmonisation at an EU level. The Secretariat noted that is not clear what the European Commission means when referring to valuation processes. W. Kälberer suggested the following elements would be covered by valuation processes: Application Terms of engagement Valuation report Liability insurance W. Kälberer acknowledged the importance of transparency and clarity in processes but insisted upon the importance of a principle-based approach and stressed that any future legislation should not be prescriptive but rather should only refer to the parameters of the process. He added that the national authorities should be in charge of outlining the valuation process. The Chairman and E. Røjgaard agreed that the whole process should be dealt within the context of internationally accepted standards. W. Kälberer summarised that the valuation process should be: Transparent Independent Based on international standards Structured The Secretariat will take account of the Committee s views in the elaboration of the the EMF-ECBC response to the Consultation Paper on Covered Bonds 3. EBA Opinion on Mortgage Lending Value (MLV) The Secretariat recalled that on the 5 th of October, the EBA had published an Opinion on the mortgage lending value (MLV) addressed to the European Commission and related to the EBA's mandate to deliver technical standards harmonising the concept of MLV in the CRR. In this Opinion, the Authority raises concerns about the possible unintended consequences that a harmonised definition of MLV across the CRR might have on the EU covered bonds market. Further to a question from E. Røjgaard, W. Kälberer explained that the MLV is used in Germany, Austria, Poland and Spain and that Romania had recently included it in its covered bond law. E. Røjgaard wondered where the mandate to the EBA in the CRR had originated from. W. Kälberer explained that it had come from the European Council, thus from the Member States (MS) as a result of concerns raised by some about the MLV concept itself. There was a common agreement to mandate the EBA to design a rigorous framework. Ironically, none of the countries applying the MLV had asked for 2

this. On the basis of its mandate, the EBA drafted a very synthetic model, which, according to German valuers would not be practicable in the market. W. Kälberer suggested that the best outcome for the time being is the EBA Opinion, which asks the European Commission to clarify the mandate and remove or replace it, because it has effectively halted progress on this issue for the time being. Apparently even the European Commission is not quite sure yet on how to proceed: possibly with a future CRR II. W. Kälberer suggested that the Industry should not intervene anymore at this stage as there would be a risk of collateral damage of pursuing a RTS based approach. R. Lucariello asked whether there is freedom for MS to choose to use the MLV. W. Kälberer replied that guidance on the criteria for the elaboration of the MLV could have the effect of discouraging those who do not use MLV from doing so. It could also mean that those who use it stop using it. E. Røjgaard asked whether the Spanish MLV is different from the German one. W. Kälberer replied that it based on a discount of the market value. As a consequence, it is more volatile with respect to German MLV, which has no link with the market value. [The Spanish delegation requests the addition of the following clarification: This statement is only valid in the case of a portion of total completed houses (residential real estate) that are intended for own use by the owner, and only if it can be assessed that a broad and stable market of comparable properties exists in that location. In other cases, even when it comes to rural properties, the MLV is calculated by different methods in Spain trying to ensure the sustainability of the value along the business cycle.] In response to a question from R. Lucariello, W. Kälberer explained that the Polish MLV is similar to the German one from a methodological standpoint. However, it is only applicable to mortgage banks, of which there are only three in Poland. W. Kälberer underscored the importance of challenging the full harmonisation approach more generally. He pointed out that RICS is currently working on a UK version of the MLV, which will take the form of a sustainable long-term value. He suggested that the best outcome would be for EBA of pursuing a principles based approach (Guidance on MLV) and for MS to be left to decide how they design the MLV methodology at national level. The Secretariat will continue to monitor developments in relation to the MLV file and keep delegates up-to-date on any developments. 4. Mortgage Credit Directive (MCD) & other retail financial services developments at EU level The Secretariat provided delegates with an overview of the European Commission s work on transposition of the MCD. Delegates were invited to exchange information on the way in which their respective Member State national competent authorities intend to transpose the property valuation article into national law. Italy A draft law was published in September and will be approved by spring 2015 but it will still need to be formally adopted by decree thereafter. The implementation of Article 19 will be done at a very high level And will most likely favour self-regulation, specifically, the guidelines promoted by ABI, ASSOVIB, all the professional bodies of who can perform valuations in Italy, as well as Tecnoborsa, the agency of Italian Chamber of Commerce specialised in valuations of immovable properties. Sweden 3

Sweden will most probably be delayed in terms of implementation, possibly as late as summer 2016. The Government wants the FSA to regulate valuation separately. The Government will also allow the FSA to regulate amortisation. Legal problems are expected in the process of transposing the MCD. Hungary The Hungarian government started reviewing its mortgage-related legislation. Most likely the new legislation will include also the article 19 provisions. The Hungarian National Bank will also play a role in the implementation. Romania There have been some delays in transposing the Directive. The national law was drafted by the Consumer Protection Association. One of the key valuation related provisions is that borrowers may choose any valuer on a list of certified ones held by the banks. While the Consumer Protection Association maintains that the client should be able to choose any ANEVAR valuer, the banks argue that an internal list of certified valuers is necessary to ensure the quality of the valuations and the accountability of valuers. The Secretariat will keep delegates informed of developments at EU level with regard to the transposition of the Directive; Members will inform the Secretariat of any developments in their markets in this area. 5. Use of AVMS in the EU & Portfolio Evaluation The Secretariat gave participants an update on the revised draft EMF Note on the Use of AVMs in the EU with a specific focus on portfolio valuation, which is being drafted in cooperation with the European AVM Alliance (EAA). The Secretariat explained that bilateral discussions had taken place with between the EAA, CRIF and the Spanish and Italian delegations which had expressed concerns about certain elements of their respective country information in the draft Note. These concerns have now been addressed. The Secretariat went on to explain that the comparative accuracy section would be made more neutral and renamed Relative merits of each technique and that the comparative accuracy data in annex would be removed. These proposals were welcomed by delegates, subject to their ability to review and comment on the changes. The Secretariat will liaise with the EEA on the redrafting as outlined above; The Secretariat will circulate a subsequently revised draft to delegates for final comments and/or approval in due course. 6. Joint EMF/TEGoVA commercial mortgage valuation specification The Secretariat recalled that the EMF and TEGoVA had cooperated on the drafting of a Commercial Mortgage Valuation Specification in 2014. The Secretariat took the opportunity of the meeting to inform delegates that Deutsche Pfandbriefbank AG and the Association of Danish Mortgage Banks had both indicated their intention to promote the use of the Commercial Specification within their respective organisations as best practice guidance. Both had indicated that the Specification should not be made binding. The Secretariat invited delegates to share any information on plans to implement the Commercial Specification. The Secretariat also informed delegates that TEGoVA had indicated its 4

interest in exploring the possibility of drafting a Residential version and asked for delegates views in this respect. The Chairman informed delegates that the Commercial Specification had been circulated to mortgage banks and their networks in Hungary. Differences in methodologies were reported between normal practice and certain elements of the Specification. There is a certain interest but it remains a tricky process. L. Varandas agreed on the utility of having best practice benchmarks. R. Lucariello observed that it would be useful to work on a Residential Specification but that the specification should not be made mandatory. E. Røjgaard noted that there are quite a few differences between residential and commercial valuation. J. Quentin added that every bank tend to have different standards and that the drafting of a Residential Specification will be trickier than for the Commercial one. W. Kälberer expressed the importance of understanding what a standardised residential valuation report is. He suggested that the 2/3 page residential valuation report favoured by lenders may not be viewed as EVS compliant from a TEGoVA point of view. The Secretariat suggested that, as with the Commercial version, it could invite John Hockey to provide a first draft for delegates comments, with a view to discussing with him during the next meeting of the Committee in May. The Secretariat will contact John Hockey and invite him to provide a first draft of a Residential Specification; The Secretariat will invite John to participate in the next meeting of the Committee in May. 7. EMF-ECBC initiative on financing energy efficiency The Secretariat provided an overview of the EMF-ECBC s work in relation to the green mortgages and green covered bonds, highlighting in particular the EMF-ECBC Roundtable on Financing Energy Efficiency which took place on the 1 st of October and the valuation aspects of the discussion. The Secretariat also informed delegates that a second Roundtable will take place on the 26 th of February 2016 in Brussels, to which delegates will be invited. E. Røjgaard pointed out that a system of preferential interest rates for those borrowers who invest in energy efficiency measure might penalise lower income borrowers who are not able to spend on green renovations. R. Lucariello expressed his support for the initiative. He wondered about the treatment of loans on properties which are already green. W. Kälberer pointed out that the green bond market is being driven by investors who are developing green financing strategies. Green bonds well in a low/no yield environment. The real challenge is how to deal with the asset side in order to obtain green projects to be funded. This can be done basically in three ways by way of incentives to borrowers and banks: a lower interest rate for green borrowers, better regulatory treatment of green items on banks balance sheet, or by tax incentives. In order to put in place any of these methodologies a measurement is needed. The measurement can be carried out 5

only by tracking energy consumption or energy demand. The former can be misleading when it comes to empty households. The latter is more difficult and expensive to measure. The Chairman noted that in Hungary energy ratings are not included in the valuation report. S. Cappelli noted that in Italy energy ratings are included in valuation reports but not taken account of in the value. The Secretariat will keep delegates informed of developments in relation to this ongoing initiative and invite delegates to participate in the February 2016 Roundtable. 8. The European Group of Valuers Associations (TEGoVA) The Chairman invited S. Cappelli to provide an update on TEGoVA s work in relation to the AQR. S. Cappelli explained that TEGoVA decided that it would provide recommendations to the ECB on amendments to the AQR manual but that it had not yet received any feedback from the ECB on its proposals. In response to a question from E. Røjgaard on the likelihood of a second AQR, S. Cappelli indicated that there will be a stress test exercise in 2016, with an evaluation of values, but not in the form of an AQR. R. Lucariello pointed to the changing landscape in Italy, with the recent reform of popolari & cooperative banks and discussions about the likeliness to merge, which could create new players in the market that in the future could fall under the supervision of the ECB. W. Kälberer added that the number of banks under ECB supervision will increase moving-forward. E. Røjgaard wondered whether TEGoVA had had a discussion with the ECB on the possibility of using the cost approach in the context of the AQR. As yet, no such discussion has taken place. W. Kälberer gave delegates an update on the key issues under discussion within TEGoVA: EVS 2016 is almost finalised The applications will be renamed guidance notes There will 10 guidance notes, replacing 5 applications There will be a new section on valuation methodology AVMs have been taken into consideration as an Information Paper. TEGoVA will also introduce a new qualification label for valuers only valuing residential property from the 1 st of January 2016. The TEGoVA Residental Valuer (TRV) Label will also meet the MCD requirements. The Chairman explained that the Secretariat had received an invitation from TEGoVA to consider observer membership. He asked delegates whether they saw an interest in an EMF membership of TEGoVA and explained that the Valuation Committee was expected to give a recommendation to the Executive Committee in this respect. Views were divided in the Committee. Some delegates highlighted that EMF membership could have the advantage of providing direct access to relevant information on key issues of common interest. Other delegates were however concerned that there could be conflicts of interest between the banking sector and the valuation profession on the key issues under discussion. It was furthermore stressed that the EMF should remain neutral in its relationships with TEGoVA and RICS. 6

In the absence of a unanimous view, it was agreed that the Secretariat would present the different points of view to the Executive Committee during its meeting on the 20 th of November for final decision. The Secretariat will present the different points of view to the Executive Committee during its meeting on the 20 th of November for final decision. 9. Royal Institution of Chartered Surveyors (RICS) The Secretariat gave delegates an update on the RICS activities in the area of property valuation: In May 2015 RICS published a valuation alert for members on Mortgage Lending Value (already shared with the EMF valuation committee I believe?). More in-depth guidance has been put on hold until the situation with the EBA and EC regarding MLV under CRR has become clear. Two additional national Red Book chapters have been published: o Germany (September 2015) o France (October 2015) A new guidance note on valuation of intellectual property rights was published Valuation & Sustainability EU funded projects o RenoValue, which aims to develop a training package for valuers on how to incorporate energy efficiency and renewable energy features in the valuation process, is in its final stages. Pilot trainings are currently being held in the 7 participating countries, after which o the training package will be finalised for public use ReValue, a recently started project, aims to look at valuation standards, and how to best take sustainability features into account The International Valuation Standards will be updated and a draft consultation will take place in 2016. Once finalised, RICS will update its Red Book accordingly. This item was on the agenda for information only. 10. Roundtable on national developments Denmark Prices in the big cities increased substantially. There were discussions on the reform of valuation regulations because of the government concerns on the lack of lending for the countryside, but property valuations were not found to be at fault and therefore no changes will be made. Germany Given the scale of the German car industry, the Volkswagen scandal might have an impact on the German economy, particularly in relation to the Chinese situation. The arrival of refugees in Germany, levels of which have not been seen in 20 years, will put a strain on social housing in the future. The residential market appears to be peaking in cities. The price trend in the countryside is instead southward. Berlin house prices have doubled in 10 years. The rental market is still solid although we observe a reduction in yield. Office rentals follow a similar pattern to the housing ones. Investors are focussing on the hotel sector looking for higher returns. A regulation has been introduced for the investment method, which reduces the number of decisions that have to be made. The result is however a shift away from the real market. Italy 7

The economy is showing some signs of vitality. GDP is expected to grow 1% year-on-year by the end of 2015. New guidelines for valuations are to be finalised before December. Low interest rates are stimulating demand for housing. There has been an increase in demand of 90% (1/3 of this is refinancing). The rental market remains stable. Sweden Commercial rental runs at high volumes with low yield in urban areas. Residential prices will rise. Amortisation rules will have to be harmonised with the Mortgage Credit Directive, but some potential conflict is expected. There will be challenges in housing incoming refugees as a result of the lack of homes for them. Romania The economy is slightly picking up. The national bank has kept its dovish stance and interest rates remained low. As a consequence credit volumes increased with the help of the Prima Casa program. In the first semester of 2015, 15,600 mortgage loans were granted, representing an 11% increase compared to the same period in 2014. There is a general increase in interest in buying a home. The average amount of loans granted was EUR 36,000. Developers are now looking towards other Romanian cities to build. Romania is following a positive trend, similar to that in the Czech Republic and Poland. New valuation principles for property taxation purposes will be introduced in 2016. ANEVAR has launched a database together with the Romanian Banking Association containing all valuation reports. There are 22,000 reports in the database, of which 16,000 are residential. Portugal In September, new legislation will be introduced regulating valuer activity, with a particular focus on: valuer registration, professional qualifications, experience and professional indemnity insurance, the content of the valuation report, the responsibility of the supervisory and regulatory authorities and sanctions. There has been an increase in liquidity in the market and in house prices. Hungary The market is seeing the lowest interest rates ever at 1.35% versus 11.5% in 2008. The economy is still recovering and restructuring but a fundamental change is still needed in the real estate market. There is currently an average 4% increase in house prices, although in Budapest house prices are increasing by 20%, and even 30% on apartments. The number of transactions has also increased and is expected to reach 150,000 units in 2015. Rental yields in the cities are between 7% and 8%, driven in particular by a subsidy system since the 1 st of July for families. The residential loan market is growing, the number of bad loans is still high there is interest in personal insolvency legislation and the Industry has high hopes in this area. Another new regulation addresses the amount of the loan to be covered with a mortgage (there will be an increase in the amount). Some banks are looking to establish mortgage banks. The office market is in good shape. This item was on the agenda for information only. 11. AOB The next meeting of the Committee will take place on the 27 th of May 2015 in Cluj. A. Vascu of ANEVAR very generously offered to host the next meeting. Delegates were requested to check the list of members to ensure it is correct. 8

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