Initiative Long-term Sustainable Value
For the past several years, there has been intense discussion, including outside of Germany, about how to identify a sustainable property value for financing purposes (Long-Term Sustainable Value/ Mortgage Lending Value), both in connection with European banking regulation and on the national level.
That particularly applies to several countries that were hit especially hard by the recent turbulence on the real estate and financing markets and are now working on concepts to prevent such crises in future. The Mortgage Lending Value as conceived of under the German Regulation on the Determination of the Mortgage Lending Value (Beleihungswertermittlungsverordnung, BelWertV) has only limited suitability for this purpose, since it relies heavily on the German method of valuation and on the valuation parameters that have been established here. This was reason for creating the Long-Term Sustainable Value Network. Experts from a number of European countries are using this forum to develop an internationally applicable method for determining the Long-Term Sustainable Value.
Although for many years, the Mortgage Lending Value was a valuation concept that was used almost exclusively in Germany, its application, definition, and methodology are now also being discussed on the European level. There are two reasons for this:
European banking regulation
- The Mortgage Lending Value is a fixture of European banking regulation, e.g. the Capital Requirements Regulation (CRR). For instance, Article 124(4) CRR mandates that the European Banking Authority (EBA) is to develop draft regulatory technical standards to specify the rigorous criteria for the assessment of the Mortgage Lending Value. In addition, the Mortgage Lending Value is being discussed in connection with deliberations relating to harmonisation of European covered bonds.
Experiences in the wake of the financial market crisis
- Following the crisis on the real estate and financial markets in 2008, a number of countries launched initiatives focusing on how value can be sustainably determined for financing purposes, including countries that until now have exclusively used market values in connection with lending, such as the UK and Ireland. This highlights the doubts associated with relying exclusively on a concept that employs a reference date-based market value for property financing, which generally has a longer term. As a result, it is being discussed whether it might be more suitable for these purposes to use a valuation approach that excludes speculative elements and focuses on the long-term, sustainable characteristics of the property.
Long-Term Sustainable Value Network
Pfandbrief banks have consistently relied on the Mortgage Lending Value for decades. The fact that Pfandbriefe emerged from the crisis on the financial markets relatively unscathed is attributable, among other things, to this conservative approach to valuation.
The Pfandbrief banks welcome a common European standard concerning the method for determining the Long-Term Sustainable Value, provided that it is principles-based and leaves room for the special features of each country’s real estate market and its valuation processes. Such a standard would offer a unique opportunity to define a European Long-Term Sustainable Value and to strengthen its acceptance.
In order to be well prepared for the discussion of regulating the determination of value for financing purposes at the European level, the vdp, in concert with HypZert, launched the Long-Term Sustainable Value Network (L-TSV Network). The aims of this network are:
- to promote the Long-Term Sustainable Value as the basis for determining value for lending purposes,
- to develop an internationally applicable method for determining the Long-Term Sustainable Value, and
- to promote training and education with regard to determining the Long-Term Sustainable Value
In the first phase of the project, an international working group composed of representatives from seven countries developed a draft of a principles-oriented methodology for determining the Long-Term Sustainable Value. Nearly all of the participants were valuers with extensive experience in determining Mortgage Lending Values. Now completed, the draft provides a good basis for international discussions on a European methodology for determining the Long-Term Sustainable Value.
It rebranded the mortgage lending value as the “Long-Term Sustainable Value”, and it has led to an expansion of the L-TSV Network and discussion of the methodology.
The second phase of the project now involves the detailed discussion of how the method should work on the national level and what specific form it should take.
The current discussion concerning lending valuation on the basis of the Long-Term Sustainable Value for the purposes of European banking regulation presents both opportunities and risks. The risk of fully harmonised regulation through European banking supervision – difficult to apply, limited freedom of action – stands in contrast to the unique opportunity to create a European, principles-based method of determining the Long-Term Sustainable Value and to expand its breadth of use. By creating the Long-Term Sustainable Value Network, the vdp hopes to help ensure that the opportunities brought by these the regulatory efforts outweigh the risks, and also to help make those opportunities a reality.