1. The Real Estate Forum Tuesday, 4 th May 2004 Bucharest

2. The Financial Integration of European Real Estate Markets Simon Walley Head of Economic Affairs European Mortgage Federation

3.  European association founded in 1967  Represents the interests of mortgage lenders  Romanian members are National Housing Agency  Brings together mortgage lenders from all EU countries and Switzerland  Accession countries membership: Czech Rep., Hungary, Malta, Poland & Latvia  Represents over 75% of EU mortgage market

4. European Integration  Background to European Mortgage Markets  Measuring Financial Integration  What are the benefits for lenders/borrowers?  Obstacles to Integration  Achieving the single market

5. European Integration  Background to European Mortgage Markets  Measuring Financial Integration  What are the benefits for lenders/borrowers?  Obstacles to Integration  Achieving the single market

6. Market trends  Outstanding volume of mortgage loans in 2002 exceeded EUR 4.2 trillion  Twice the amount of 10 years ago  Growing at approx. 8% per year over the last 10 years  Around 42% of European GDP

7. Mortgages Outstanding - 2002 Source: European Mortgage Federation € Billion

8. Mortgage Debt/GDP Ratio -2002 Source: European Mortgage Federation EU 42.6% US 79.6%

9. Mortgage Debt per Capita - 2002 South – €4,200 North – €15,300  Big difference in debt levels between Northern and Southern Europe  Home ownerships and cultural factors behind difference  Gap diminishing with rapid growth of Southern European mortgage markets with slower growth in the North Source: European Mortgage Federation € Thousands per Capita

10. Home Ownership Rates -2002 Source: European Mortgage Federation

11. Growth in Mortgages – 1992/02 Source: European Mortgage Federation % Annual Rate of Growth in Mortgage Balances Outstanding EU Average – 8.2%

12. European Integration  Background to European Mortgage Markets  Measuring Financial Integration  What are the benefits for lenders/borrowers?  Obstacles to Integration  Achieving single market

13. Measuring Integration  Cross-border lending  Law of One Price – In an efficient market, assets generating same return should be priced the same regardless of location  Level of Industry consolidation

14. Cross-border lending?  Virtually non existent for residential mortgage markets  Mainly limited to holiday homes  Some regional initiatives such as UCB in Mediterranean countries or Nordea in Scandinavia  Pan-European Internet Banks have largely failed

15. Cross Border Commercial Real Estate Investment 2003 Source: DTZ Debenham Tie Leung

16. Law of One Price - Mortgage Rates  Nominal Interest rates vary widely by market  However, these comparisons do not compare ‘like with like’ –Differences in interest rate variability Variable v fixed rate Length of fixed rate term –Differences in national base rates –Prepayment options included in the product –Credit risk differences  A more refined measure is needed to compare price levels Source: Mercer Oliver Wyman Unadjusted mortgage rates Range 166 bp

17.  Adjusted price is a measure of price levels not pass-through  Component methodology –Nominal rate, fees and yield curve adjustment at product level –Credit risk and prepayment adjustments at country level Caveats  Discounts from the published price are not reflected in the analysis  Point in time analysis and so does not reflect trends  Sample weighted towards larger lenders  Data based on questionnaire responses from lenders supplemented by publicly available price data Source: Mercer Oliver Wyman Adjusted mortgage rates methodology Law of One Price - Mortgage Rates

18.  60% of differences in nominal rate are due to underlying product differences  Countries with highest nominal rate are not those with the highest adjusted price  Average adjusted prices are in a range of 64bp  This is less than the variation in prices within many markets Source: Mercer Oliver Wyman Adjusted mortgage rates Range 64 bp Law of One Price - Mortgage Rates

19. Market Consolidation - National Source: Mercer Oliver Wyman National Market share of top 5 lenders

20. Market Consolidation - International  UK, Germany, France, Italy, Spain largely domestic banks with no foreign ownership  Benelux and Scandinavia more international  Central and Eastern European markets dominated by foreign banks – 75% of banks are foreign owned (US and EU)  No true European banks at retail level

21. European Integration  Background to European Mortgage Markets  Measuring Financial Integration  What are the benefits for lenders/borrowers?  Obstacles to Integration  Achieving single market

22. Benefits of Integration  Reductions in cost levels allowing reductions in prices or increase in profitability –Servicing costs –Distribution and origination costs –Funding and risk management costs  Market completeness gaps –Gaps relate to high risk mortgages, fixed rate products, indexed and capped adjustable rate mortgages and flexible repayment products –Product gaps often driven by regulation e.g. consumer protection  There is still potential for individual markets to become more efficient and complete –Greater integration is one possible driver of benefits –However some benefits can be delivered via domestic change alone

23. European Integration  Background to European Mortgage Markets  Measuring Financial Integration  What are the benefits for lenders/borrowers?  Obstacles to Integration  Achieving single market

24. No business case for cross- border lending?  Average return on a mortgage loan is low  High costs associated with setting up a business in another country (distribution channels, access to borrower information, etc)  Market inefficiencies related to loan approval, mortgage registration and repossession  lack of market scale, lender size & loan size  Cross-subsidisation

25. European Integration  Background to European Mortgage Markets  Measuring Financial Integration  What are the benefits for lenders/borrowers?  Obstacles to Integration  Achieving single market

26. Financial Services Action Plan  A series of measures agreed at Lisbon summit in 2000 and intended, by 2005, to fill gaps and remove barriers to a Single Market in Financial Services  “act as a catalyst for economic growth across all sectors of the economy, boost productivity and provide lower cost and better quality financial products for consumers, and enterprises, in particular SMEs”

27. FSAP key objectives  A single wholesale market  An open and secure retail market  State-of-the-art prudential rules and supervision  FSAP Measures cover: Securities, Accountancy, Company Law, Insurance, Savings, Payments, Money Laundering, e- Money, Insolvency, Supervision

28. FSAP Progress – end 2003  State of play on individual original FSAP measures Proposals to be made:  CAD  14 th Company Law Directive Under Negotiation:  Revised ISD  Transparency  Take-over bids  10 th Company Law Directive Completed

29. Basel II and CAD III Rules  Will have an impact on all credit institution in Europe  Will set common capital adequacy standards…  … but also encourage standardisation of Risk Management, Supervision, Accounting, Valuation, Disclosure, etc  Still a number of questions, including 70 items of national discretion

30. EMF Recommendations (1-6) 1.Improving cross-border transparency 2.Extending the scope of the Code of Conduct 3.Introduce common price calculations to allow comparisons Building Trust 4.Improve cross-border access to national credit registers 5.Improve transparency of Europe’s land registers 6.Improve European mortgage collateral systems Improve Efficiency – Lower Costs

31. EMF Recommendations (7-9) 7.Allow borrowers greater flexibility to move lenders Increase level of competition 8.Develop a European secondary mortgage market to fund Europe’s mortgage loans Reduce Cost of Funding 9.Create a level playing field by eliminating state subsidies and guarantees which distort mortgage markets Create a level playing field

32. 6 Key Fundamentals for an efficient, integrated Housing Finance System  Sound macro-economic policies  Low transaction costs  Efficient “primary market”  Promote transparent markets  Consumer Protection  Standardised funding instruments to tap capital markets Conclusions