This is the first of a four-part series based on my recent trip to Singapore to attend and present at the Inaugural International Valuation Standards Council – World Association of Valuation Organizations (IVSC-WAVO) Global Valuation Conference.
I attended the Inaugural IVSC-WAVO Global Valuation Conference in Singapore on June 25th and 26th. As part of my experience, I was asked to deliver a presentation during the Property Tax Issues and Legal Case Matters in Valuation Workshop. My presentation focused on recent real estate and patent infringement cases in the United States. I was able to share my personal experience in these matters and showcase several other examples of cases that are typical in the United States when intellectual property is at the center of litigation. The following is a recap of the first plenary session on Day 1 of the conference.
One of the most informative topics covered during the first plenary session at the conference was mortgage-backed securities. Wolfgang Kälberer from the Association of German Pfandbrief Banks spoke about valuation for lending purposes in Europe, specifically transvaluation. Kälberer explained covered bonds and how they work, especially since they are more prevalent in Europe. Covered bonds are created when financial institutions purchase a bundle of cash-flowing investments (similar to mortgage-backed securities in the United States) which are backed, or covered, by the cash flows from the investments. Covered bonds are segregated from a bank’s balance sheet. While they are not common in the United States, covered bonds are slowly gaining more recognition.
Kälberer also spent some time considering the difference between market value and mortgage lending value. According to the U.S. Appraisal Institute, market value is the estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without being under compulsion. Mortgage lending value, on the other hand, is the value of immovable property as determined by a prudent assessment of the future marketability of the property taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use, and alternative appropriate uses of the property.
In expressing the how values are monitored in Europe, Kälberer explained that commercial property values are monitored at least once per year, and residential property values are monitored every three years. According to the Basel III post-crisis reforms set forth in December 2017, valuation is determined in a conservative manner and must include expectations on price increases and must be adjusted to account for the potential for the current market price to be significantly above the value that would be sustainable over the life of the loan. Basel III standards are minimum requirements developed by the Basel Committee on Banking Supervision in response to the financial crisis that occurred from 2007-2009. These standards apply to all banks operating internationally.
A group of European valuation experts developed a methodology for determining the long-term sustainable valuation of property, or L-TSV. Designed as a risk-management tool, L-TSV is based on the sustainable long-term characteristics of the property, and excludes speculative elements and cyclical fluctuations in value. L-TSV is widely used in Germany, and the use of L-TSV is thought to be one of the reasons that Germany has not been affected by real estate fluctuations like many other countries.
The opening sessions at the IVSC-WAVO Global Valuation Conference were insightful and informative. Stay tuned for additional takeaways from my experience in Singapore.
Contact: Cliff Lipscomb