1. Valuations for bank lending purposes
May 2012
____________________________________________________________________
Perit Ondre Camilleri-Gaglione
Member, valuations sub-committee

2. Overview ___________________________________________________________________
Valuation standard
The valuation basis
Market value
Mortgage lending value
The Valuer
Valuation types
Investment properties
Development properties
Properties valued on their trading potential
Wasting assets
Forced sale value, or liquidation value
Synergistic, or Marriage value

3. Valuation standard - brief overview ___________________________________________________________________
Update from the KTP’s 2004 publication, to comply with
European 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, and
the 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 Value
and the Mortgage lending Value implies that especially
volatile conditions exist, which may distort the value so that
the future marketability is at risk.

8. The Valuer - responsibilities & obligations ___________________________________________________________________
Valuers must be qualified to give advice on
comparative property
sector related risk
business analysis
property cycles
market trends
orderly asset disposal
liquidation 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 is
An 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 value
vacant 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 funds
when planning permission is obtained,
when the site is purchased,
or subsequent development,

12. Development properties - Land or buildings ___________________________________________________________________
Valuation based on
sensitivity analysis.
volatility due to changes in rent, yield, cost, timing, bank charges
Valuers must consider
planning 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 stated
Cash flow, DCF, residual Valuations, and/or comparison methods.

13. Trading potential - hotels, retail, leisure facilities ___________________________________________________________________
The valuation is based on
sustainable 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 where
The 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 consider
Finite resource
Value 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 sale
Sale 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 role
Each 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 by
Lending institutions
Audit firms
Law Courts
Inland Revenue Department

18. Valuation Standards – the way forward _________________________________________________________________
Our challenge
consistency
accuracy
reliability
We all have a role to play in implementing the new valuation standards. 
Thank you.
__________________________________________________________________
Perit Ondre Camilleri-Gaglione May 2012