Valuation of Immovable Property Collateral

Definition

Valuation of Immovable Property Collateral concerns the methodologies used to perform Collateral Valuation for various forms of Real Estate in the context of it being used as Collateral in secured lending

EBA Requirements

At the point of origination, institutions should ensure that the value of all immovable property collateral for loans to consumers and micro, small, medium-sized and large enterprises is assessed by an internal or external valuer using full visit with internal and external assessment of the property.

As a derogation from the previous paragraph, for the purposes of a valuation of residential real estate in well-developed and mature property markets, the value may be assessed by means of a desktop valuation, carried out by an internal or external valuer and supported by advanced statistical models.

The valuer remains responsible for the valuation, while advanced statistical models should be used as supporting tools, meeting the conditions set out in Section 7.4, and including a confidence measure to indicate the robustness of the value proposal and other relevant property-specific information. In this case, the value proposal should be assessed, reviewed and approved by the internal or external valuer, who should understand all inputs and assumptions considered in the model. If the confidence measure in the supporting advanced statistical model indicates low robustness, and/or other property-specific information gives rise to uncertainty about the value proposal, the valuer should choose a valuation method other than desktop valuation.

When institutions use external valuers, they should establish a panel (a list) of accepted external valuers. The composition of the panel of valuers should ensure that valuers have relevant expertise in relevant segments of the property sector.

Institutions should ensure that the valuers provide an impartial, clear, transparent and objective valuation, and each valuation should have a final report providing the necessary information on the valuation process and property. The valuation report should clearly state who ordered the valuation and that the valuation has been requested for the purposes of loan application, renewal or contractual adjustments, or in the case of structural changes.

Valuation should be carried out (internal valuation) or ordered (external valuation) by the institution or a collateral agent (in the case of syndicated loans), unless it is subject to a request from the borrower.

At the end of the valuation process, institutions should ensure that they have obtained, for each property collateral, a clear and transparent valuation report documenting all elements and parameters that determine the value of the collateral, including all the information necessary and sufficient for easy understanding of these elements and parameters, in particular:

• the reference value of the collateral;
• the approaches, methodology and key parameters and assumptions that have been used to assess the value;
• a description of the collateral, including its current use or multiple uses if applicable, and the property type and quality, including age and state of preservation;
• a description of the location of the collateral, the local market conditions and the liquidity;
• the legal and actual attributes of the collateral;
• any known circumstances that may affect the value in the short term, including drawing attention to and commenting on any issues affecting the degree of certainty or uncertainty.

Institutions should critically review the valuation they receive, from the valuer, in particular focusing on aspects such as

• comprehensibility (whether the approaches and assumptions are clear and transparent)
• the prudence of assumptions (e.g. as regards cash flow and discount rates), and
• the clear and reasonable identification of comparable properties used as a value benchmark.

See Also

• EBA Guidelines on Loan Origination and Monitoring