Valuations for bank lending purposes

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

2. Overview___________________________________________________________________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. DivergenceMarket 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.

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 valueor 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