Presentation on theme: "Valuations for bank lending purposes"— Presentation transcript:
1 Valuations for bank lending purposes May 2012____________________________________________________________________Perit Ondre Camilleri-GaglioneMember, valuations sub-committee
2 Overview ___________________________________________________________________ Valuation standardThe valuation basisMarket valueMortgage lending valueThe ValuerValuation typesInvestment propertiesDevelopment propertiesProperties valued on their trading potentialWasting assetsForced sale value, or liquidation valueSynergistic, or Marriage value
3 Valuation standard - brief overview ___________________________________________________________________Update from the KTP’s 2004 publication, to comply withEuropean Valuation Standards(EVS) 2009, by The European Group of Valuers’ Association (TEGOVA).Adopts IAS valuation standards.Revisions to the Rent Law Act X (2009).Introduction of the Energy Performance Certificates.(2009)MEPA’s revised method of measurement. (2007)Land Registry requirements.
4 Valuation standard ___________________________________________________________________ KTP’s valuation standard states that“ the examination of valuation issues for security for loans against property,which carry a high degree of fiduciary responsibility,must take account of the purpose of the valuation,an objective assessment of risk,linked to the structure and duration of the proposed loan facility, andthe transparency in the reporting of valuation data, market context and cash flow.”
5 Valuation basis - Market value ___________________________________________________________________ Market value shall mean“ the price at which land and buildings could be sold under private contract, between a willing seller and an arms length buyer, on the date of valuation, it being assumed that the property is publicly exposed to the market, that market conditions permit orderly disposal, and that a normal period, having regards to the nature of the property, is available for the negotiation of the sale.”Spot market assessment
6 Valuation basis - Mortgage lending value __________________________________________________________________Mortgage value shall mean“ the value of property as determined by a valuer making a prudent assessment of future marketability of the property, by taking into account long term sustainable aspects of the property, the normal and local market conditions, the current and alternative use. Speculative elements may not be taken into account.”Assessment of future marketability
7 Divergence Market Value vs Divergence Market Value vs. Mortgage Lending Value ___________________________________________________________________Divergence of more than 20% indicates that the market is volatile.Valuer obliged to identify the cause, such as:political uncertainty,market distortion due to short term demand,speculative nature of transaction,shifting consumer taste / trends,unsustainable development / low quality property,abrupt changes to legislation.Any divergence in excess of 20% between the Market Valueand the Mortgage lending Value implies that especiallyvolatile conditions exist, which may distort the value so thatthe future marketability is at risk.
8 The Valuer - responsibilities & obligations ___________________________________________________________________Valuers must be qualified to give advice oncomparative propertysector related riskbusiness analysisproperty cyclesmarket trendsorderly asset disposalliquidation procedures
9 The Valuer - reliability ___________________________________________________________________ The Accredited Valuer must be a Perit.Competence in the property type / business sector.Must declare any conflict of interest.Valuer may be internal or external to lender.External Valuers to accept instructions from the lender, not the borrower
10 Investment properties - revenue producing ___________________________________________________________________Valuation based on whether the property isAn individual property.Or one which is part of an investment portfolio .Valuer must establish the applicable market discount / premium.An individual property may be exposed to certain risks / premiums.In a diversified portfolio, individual property risk is reduced.
11 Owner occupied properties ___________________________________________________________________ Valuation based on market or mortgage lending valuevacant property.to let, or for sale.In respect of buildings and land for development, the valuation will asses the risk, and will depend on whether the lender advances fundswhen planning permission is obtained,when the site is purchased,or subsequent development,
12 Development properties - Land or buildings ___________________________________________________________________Valuation based onsensitivity analysis.volatility due to changes in rent, yield, cost, timing, bank chargesValuers must considerplanning policies (present & anticipated changes).detailed cost projections / revenue generated.time frames for planning / construction / sales.cash flow projections.finance charges.Valuation methods must be clearly statedCash flow, DCF, residual Valuations, and/or comparison methods.
13 Trading potential - hotels, retail, leisure facilities ___________________________________________________________________The valuation is based onsustainable income levels.Potential fluctuations (occupier, client changes, fashion, regulatory changes.)Alternative use or forced sale value.Lender made aware of significant difference in value, between an operating business and one whereThe business is closed.Inventory is removed.Licenses / permits/ franchise agreements are removed.Other circumstances impairing future financial performance
14 Wasting assets - mineral bearing land (quarries) - waste disposal tips - leasehold properties - licenses, concessions ___________________________________________________________________The Valuer must considerFinite resourceValue is reduced by commercial exploitation.Determinate life for existing use.the remaining commercial potential under its current use
15 Liquidation value or forced sale value ___________________________________________________________________“The value that could be obtained for the property where, for whatever reason the seller is under constraints requiring the disposal of the property.”Normal market conditions do not apply.No willing seller. (normally under duress)No arms’ length buyer.Marketing duration unduly short.No normal period for negotiation of the saleSale conditions do not permit the orderly disposal of the property.The purchase price of the property is set by the highest bidder & may not reflect the market value.
16 Synergistic value or Marriage value - tenanted properties ___________________________________________________________________“An additional element of value created by the combination of two or more interests where the value of the combined interest is worth more than the sum of the original interests.”
17 Valuation Standards - summary ___________________________________________________________________ Valuers have to move from a technical to a strategic roleEach valuation type needs a particular approach.Strategic value of property varies according to purpose.Property value is not equated with cost.Achieved by engagement of accredited Valuers byLending institutionsAudit firmsLaw CourtsInland Revenue Department
18 Valuation Standards – the way forward _________________________________________________________________Our challengeconsistencyaccuracyreliabilityWe all have a role to play in implementing the new valuation standards. Thank you.__________________________________________________________________Perit Ondre Camilleri-Gaglione May 2012