BelWertV amendment: ‘An important step in the journey towards up-to-date property valuation’
Berlin, October 11, 2022
vdp welcomes changes, but sees need for further optimisation
The Association of German Pfandbrief Banks (vdp) broadly welcomes the amendment to the Regulation on the Determination of the Mortgage Lending Value (Beleihungswertermittlungsverordnung, BelWertV) that the German Federal Financial Supervisory Authority (BaFin) published on Friday last week. However, the association also believes that some aspects of the amendment are insufficient.
‘The BelWertV was in need of amendment. Overall, the adjustments that have been made will improve the general framework for the mortgage lending value calculation. It means that an important step has been taken in the journey towards up-to-date property valuation. We’d like to thank BaFin for its openness to approaching this subject,’
emphasised Jens Tolckmitt, the vdp’s Chief Executive Officer. At the same time, however, he noted that not all opportunities for the necessary renewal had been utilised and that the new amendment still needed optimisation.
Positive simplifications for small-scale lending
The vdp rates the newly decided simplifications for small-scale lending in particular as positive. For land charges, including prior encumbrances, up to an amount of €600,000, the simplifications can be applied when performing value calculations in accordance with section 24 BelWertV.
‘Just as we proposed during the consultation period, the threshold for a small-scale loan is being raised from €400,000 to €600,000. This increase is in keeping with market developments and will tangibly lessen the expenses incurred by financial institutions to process loans,’ said Tolckmitt.
Use of statistical methods represents progress
Another significant adjustment to the BelWertV pertains to the use of computer-assisted valuation methods, with the new amendment cementing the use of statistical methods in mortgage lending value calculation in official regulations for the first time. These methods can be used in connection with single- and two-family houses and condominiums. The requirements for using computer-assisted valuation models are set out with the comparative value approach in section 19(2) BelWertV. However, they now also impose additional validation, quality assurance and review obligations, among other things. For example, the cost approach is now to be applied for randomly sampled reviews for single- and two-family houses.
‘We are very satisfied that the use of statistical methods for property valuation has been integrated into the BelWertV. These methods have become so mature that they can deliver valid results reliably,’ Tolckmitt commented. ‘Making their use possible across the board for owner-occupied residential property represents significant progress for banks. Germany was at risk of falling behind other countries.’ However, Tolckmitt believes that the random cost approach checks that have been implemented are not appropriate. ‘In our view, data-based comparative value calculation is a vastly superior method compared to the cost approach and would therefore be fully sufficient.’
‘Allowing virtual viewings is an important step forward’
Following BaFin’s temporary authorisation of virtual property viewings at the start of the Covid-19 pandemic, they have now been allowed permanently with the BelWertV amendment. However, institutions that make use of this option will have to incorporate a discount of at least 5% when valuing properties. In addition, the property’s expected remaining useful life must be at least 40 years.
‘Virtual viewings have become an established practice over the last two years. They are secure and equal in quality to traditional physical viewings. It is positive that BaFin has recognised this and enabled virtual viewings on a permanent basis. This is a significant step forward,’
said Tolckmitt. He also particularly highlighted the associated simplifications for financial institutions when processing loans.
Minimum capitalisation rates tied to yield developments
The key changes in the BelWertV also include an adjustment of the minimum capitalisation rates. In place of the previous, rigid rates of at least 5% for residential property and at least 6% for commercial property, a dynamic model will be used going forward. The minimum capitalisation rates will now be based on the yield on 30-year German government bonds as at a specific reference date, with a risk premium of 3% for residential property and 4% for commercial property added on top. Rate floors and ceilings have also been stipulated, with the capitalisation rates always ranging from 3.5% to 5.5% for residential property and from 4.5% to 6.5% for commercial property, notwithstanding the premiums for specific types of properties and discounts for certain prime properties.
The Pfandbrief banks welcome the tying of the minimum capitalisation rates to general yield developments and the level of dynamism achieved as a result.
‘The new model incorporates one of our main requests. It will result in more appropriate capitalisation rates in many market phases,’ said Tolckmitt.
Reference date model leads to unwanted swings
On the other hand, the vdp holds a critical view of the reference date model that is used. In this model, BaFin will adjust the minimum capitalisation rates on 1 January each year based on the reference rate applicable on 30 November of the prior year if the latter was at least 0.5 percentage points higher or lower at this time than it was at the time of the most recent adjustment calculation. Tolckmitt said that the vdp had argued during the consultation period in favour of using an average taken over a longer period in order to reduce the volatility associated with a single reference date and take into account the differing natures of the capital and real estate markets.
‘In the last few weeks and months, what we had feared and cautioned BaFin against is exactly what happened. Spikes in yields, especially those that are as abrupt as this year’s were, can produce inaccurate results with a reference date solution, and indeed in both directions,’
Tolckmitt noted. He said it must be borne in mind that property yields in the real estate market react less dramatically than yields in the capital markets do, as can be seen in the markets presently as a result of inflation, changing interest rates and the war in Ukraine.
As an alternative to the reference date model, the vdp had proposed a rolling average of the reference rate over the previous few quarters. This approach would have smoothed out abrupt swings. The vdp will continue to address this matter with BaFin.
The vdp also believes that the chosen reference rate is not optimal. While Tolckmitt considers BaFin’s usage of a publicly available yield rate to be understandable, he explained that there is very little correlation between the performance of the German government’s 30-year bond and the property yields in the real estate market. ‘The German government’s ten-year bond would have been more appropriate for this context and in practice, as this maturity at least corresponds more closely to the three- to ten-year loan terms that are customary in commercial real estate financing.’
IT reconfiguration requires transition period
Finally, it is not clear to the vdp why the amendment of the BelWertV does not provide for a transition period and instead took effect the day after its publication. It is unrealistic to expect that financial institutions can immediately apply the modified methods and processes under the BelWertV in all of their IT systems in order to produce BelWertV-compliant appraisals. The vdp had already pointed this out during the consultation period. ‘The immediate application of the BelWertV amendment is impossible to implement in practice. Huge changes need to be made to the IT systems used by financial institutions and third-party providers for mortgage lending value calculation, which will take some time,’ Tolckmitt explained. He said that the vdp had contacted BaFin immediately after the BelWertV amendment was published and called for a practicable solution to be found in the short term.