By Sara Seddon Kilbinger, Senior Reporter, REFIRE
The German Federal Financial Supervisory Authority (BaFin) has amended the Mortgage Lending Value, or Beleihungswertermittlungsverordnung (BelWertV), by getting rid of rigid minimum capitalisation rates which, going forward, will be tied to the development of interest rates on 30-year federal bonds.
This will allow the mortgage lending values, on the basis of which banks grant real estate loans, to converge more closely with market values again. It also spells good news for lenders, who will be able once again to refinance larger shares of real estate loans comparatively cheaply via mortgage Pfandbriefe. The new adjustment came into force on 8 October.
‘The BelWertV was in need of amendment,’ stressed Jens Tolckmitt, CEO of The Association of German Pfandbrief Banks (vdp). ‘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.’
In particular, small-scale lending has been simplified: ‘Just as we proposed during the consultation period, the threshold for a small-scale loan is being raised from €400,000 to €600,000,’ Tolckmitt said. ‘This increase is in keeping with market developments and will tangibly lessen the expenses incurred by financial institutions to process loans.’
Minimum capitalisation rates tied to yield developments
Another key change in the BelWertV includes an adjustment of the minimum capitalisation rates. The formerly rigid rates of at least 5% for residential property and at least 6% for commercial property have been abandoned and, going forward, the minimum capitalisation rates will be based on the yield on 30-year German government bonds, with a risk premium of 3% for residential property and 4% for commercial property. Rate floors and ceilings have also been set out, with capitalisation rates 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,’ Tolckmitt said. ‘The new model incorporates one of our main requests. It will result in more appropriate capitalisation rates in many market phases.’
However, not everyone in the industry is convinced that the amendment to BelWertV is a good move: ‘The amendment comes too late, time has passed,’ said Birger Ehrenberg, managing partner of the appraisal firm ENA Experts. ‘Linking it to the 30-year yield on federal bonds would have made sense in 2019 or 2020, when interest rates were low. Then loan-to-value and market values would have converged. Now the reform no longer has the effect on the market that was originally intended. The only ones who are really happy about this change are the alternative financiers.’
Computer-assisted valuation methods integrated into BelWertV
Computer-assisted valuation methods have also been integrated into BelWertV, 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 for both single and two family homes. The requirements for using computer-assisted valuation models are set out with the comparative value approach in section 19(2) BelWertV.
‘We are very satisfied that the use of statistical methods for property valuation has been integrated into the BelWertV.’ Tolckmitt said. ‘These methods have become so mature that they can deliver valid results reliably. 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 feels 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.’
Virtual viewings to become permanent fixture
Following BaFin’s temporary authorisation of virtual property viewings at the start of the Covid-19 pandemic, the new BelWertV amendment will enable such viewings to become a permanent fixture. However, institutions that make use of this option will have to incorporate a discount of at least 5% when valuing properties. Under the terms of the amendment, 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,’ Tolckmitt said. ‘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.’
The BelWertV is 15 years old and had not been adjusted in line with market developments since it came into force. At the time, the income from residential properties had to be discounted at 5% when calculating the mortgage lending values. For commercial properties, the banks had to apply a minimum capitalisation rate of 6%. Only in the case of grade A office and retail properties was it permitted to apply a risk discount of 0.5% to 5.5%. And because the calculation of the mortgage lending values was fixed, the property interest rates actually achieved on the market moved further and further away from the minimum capitalisation rates with which the banks had to calculate the mortgage lending values, meaning that the BelWertV no longer reflected what was happening in the market.
Yearly adjustments going forward cause concern for industry
BaFin has said that it will adjust the minimum capitalisation rates on 1 January each year based on the reference rate on 30 November of the previous year if the latter was at least 0.5% 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 of time in order to reduce the volatility associated with a single reference date, taking 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,’ he said. ‘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.’
As an alternative to the reference date model, the vdp had proposed a rolling average of the reference rate over the previous few quarters, which would have smoothed out abrupt swings. The vdp has also argued that the chosen reference rate is not optimal, given 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,’ Tolckmitt said.
The German Federal Financial Supervisory Authority (BaFin) has amended the Mortgage Lending Value, or Beleihungswertermittlungsverordnung (BelWertV), by getting rid of rigid minimum capitalisation rates which, going forward, will be tied to the development of interest rates on 30-year federal bonds.
This will allow the mortgage lending values, on the basis of which banks grant real estate loans, to converge more closely with market values again. It also spells good news for lenders, who will be able once again to refinance larger shares of real estate loans comparatively cheaply via mortgage Pfandbriefe. The new adjustment came into force on 8 October.
‘The BelWertV was in need of amendment,’ stressed Jens Tolckmitt, CEO of The Association of German Pfandbrief Banks (vdp). ‘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.’
In particular, small-scale lending has been simplified: ‘Just as we proposed during the consultation period, the threshold for a small-scale loan is being raised from €400,000 to €600,000,’ Tolckmitt said. ‘This increase is in keeping with market developments and will tangibly lessen the expenses incurred by financial institutions to process loans.’
Minimum capitalisation rates tied to yield developments
Another key change in the BelWertV includes an adjustment of the minimum capitalisation rates. The formerly rigid rates of at least 5% for residential property and at least 6% for commercial property have been abandoned and, going forward, the minimum capitalisation rates will be based on the yield on 30-year German government bonds, with a risk premium of 3% for residential property and 4% for commercial property. Rate floors and ceilings have also been set out, with capitalisation rates 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,’ Tolckmitt said. ‘The new model incorporates one of our main requests. It will result in more appropriate capitalisation rates in many market phases.’
However, not everyone in the industry is convinced that the amendment to BelWertV is a good move: ‘The amendment comes too late, time has passed,’ said Birger Ehrenberg, managing partner of the appraisal firm ENA Experts. ‘Linking it to the 30-year yield on federal bonds would have made sense in 2019 or 2020, when interest rates were low. Then loan-to-value and market values would have converged. Now the reform no longer has the effect on the market that was originally intended. The only ones who are really happy about this change are the alternative financiers.’
Computer-assisted valuation methods integrated into BelWertV
Computer-assisted valuation methods have also been integrated into BelWertV, 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 for both single and two family homes. The requirements for using computer-assisted valuation models are set out with the comparative value approach in section 19(2) BelWertV.
‘We are very satisfied that the use of statistical methods for property valuation has been integrated into the BelWertV.’ Tolckmitt said. ‘These methods have become so mature that they can deliver valid results reliably. 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 feels 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.’
Virtual viewings to become permanent fixture
Following BaFin’s temporary authorisation of virtual property viewings at the start of the Covid-19 pandemic, the new BelWertV amendment will enable such viewings to become a permanent fixture. However, institutions that make use of this option will have to incorporate a discount of at least 5% when valuing properties. Under the terms of the amendment, 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,’ Tolckmitt said. ‘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.’
The BelWertV is 15 years old and had not been adjusted in line with market developments since it came into force. At the time, the income from residential properties had to be discounted at 5% when calculating the mortgage lending values. For commercial properties, the banks had to apply a minimum capitalisation rate of 6%. Only in the case of grade A office and retail properties was it permitted to apply a risk discount of 0.5% to 5.5%. And because the calculation of the mortgage lending values was fixed, the property interest rates actually achieved on the market moved further and further away from the minimum capitalisation rates with which the banks had to calculate the mortgage lending values, meaning that the BelWertV no longer reflected what was happening in the market.
Yearly adjustments going forward cause concern for industry
BaFin has said that it will adjust the minimum capitalisation rates on 1 January each year based on the reference rate on 30 November of the previous year if the latter was at least 0.5% 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 of time in order to reduce the volatility associated with a single reference date, taking 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,’ he said. ‘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.’
As an alternative to the reference date model, the vdp had proposed a rolling average of the reference rate over the previous few quarters, which would have smoothed out abrupt swings. The vdp has also argued that the chosen reference rate is not optimal, given 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,’ Tolckmitt said.
The German Federal Financial Supervisory Authority (BaFin) has amended the Mortgage Lending Value, or Beleihungswertermittlungsverordnung (BelWertV), by getting rid of rigid minimum capitalisation rates which, going forward, will be tied to the development of interest rates on 30-year federal bonds.
This will allow the mortgage lending values, on the basis of which banks grant real estate loans, to converge more closely with market values again. It also spells good news for lenders, who will be able once again to refinance larger shares of real estate loans comparatively cheaply via mortgage Pfandbriefe. The new adjustment came into force on 8 October.
‘The BelWertV was in need of amendment,’ stressed Jens Tolckmitt, CEO of The Association of German Pfandbrief Banks (vdp). ‘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.’
In particular, small-scale lending has been simplified: ‘Just as we proposed during the consultation period, the threshold for a small-scale loan is being raised from €400,000 to €600,000,’ Tolckmitt said. ‘This increase is in keeping with market developments and will tangibly lessen the expenses incurred by financial institutions to process loans.’
Minimum capitalisation rates tied to yield developments
Another key change in the BelWertV includes an adjustment of the minimum capitalisation rates. The formerly rigid rates of at least 5% for residential property and at least 6% for commercial property have been abandoned and, going forward, the minimum capitalisation rates will be based on the yield on 30-year German government bonds, with a risk premium of 3% for residential property and 4% for commercial property. Rate floors and ceilings have also been set out, with capitalisation rates 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,’ Tolckmitt said. ‘The new model incorporates one of our main requests. It will result in more appropriate capitalisation rates in many market phases.’
However, not everyone in the industry is convinced that the amendment to BelWertV is a good move: ‘The amendment comes too late, time has passed,’ said Birger Ehrenberg, managing partner of the appraisal firm ENA Experts. ‘Linking it to the 30-year yield on federal bonds would have made sense in 2019 or 2020, when interest rates were low. Then loan-to-value and market values would have converged. Now the reform no longer has the effect on the market that was originally intended. The only ones who are really happy about this change are the alternative financiers.’
Computer-assisted valuation methods integrated into BelWertV
Computer-assisted valuation methods have also been integrated into BelWertV, 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 for both single and two family homes. The requirements for using computer-assisted valuation models are set out with the comparative value approach in section 19(2) BelWertV.
‘We are very satisfied that the use of statistical methods for property valuation has been integrated into the BelWertV.’ Tolckmitt said. ‘These methods have become so mature that they can deliver valid results reliably. 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 feels 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.’
Virtual viewings to become permanent fixture
Following BaFin’s temporary authorisation of virtual property viewings at the start of the Covid-19 pandemic, the new BelWertV amendment will enable such viewings to become a permanent fixture. However, institutions that make use of this option will have to incorporate a discount of at least 5% when valuing properties. Under the terms of the amendment, 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,’ Tolckmitt said. ‘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.’
The BelWertV is 15 years old and had not been adjusted in line with market developments since it came into force. At the time, the income from residential properties had to be discounted at 5% when calculating the mortgage lending values. For commercial properties, the banks had to apply a minimum capitalisation rate of 6%. Only in the case of grade A office and retail properties was it permitted to apply a risk discount of 0.5% to 5.5%. And because the calculation of the mortgage lending values was fixed, the property interest rates actually achieved on the market moved further and further away from the minimum capitalisation rates with which the banks had to calculate the mortgage lending values, meaning that the BelWertV no longer reflected what was happening in the market.
Yearly adjustments going forward cause concern for industry
BaFin has said that it will adjust the minimum capitalisation rates on 1 January each year based on the reference rate on 30 November of the previous year if the latter was at least 0.5% 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 of time in order to reduce the volatility associated with a single reference date, taking 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,’ he said. ‘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.’
As an alternative to the reference date model, the vdp had proposed a rolling average of the reference rate over the previous few quarters, which would have smoothed out abrupt swings. The vdp has also argued that the chosen reference rate is not optimal, given 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,’ Tolckmitt said.
