The proffesional standard behind the figures The use of AVMs by Spanish Appraisals Firms The proffesional standard behind the figures Iñigo Amiano | Member of the board of AEV CEO of The Krata Group

The spanish perspective on LTSV and MLV Real estate cycles Normative environment of AVMs The AEV’s standard on AVMs

THE SPANISH PERSPECTIVE ON LTSV AND MLV Regulation for Mortgage Lending purposes is carried by the Ministerial Order ECO 805/2003 It’s a piece of legislation aiming to protect foreign and unskilled investors of covered bonds with RE collaterals located in Spain It requires the valuer to comply with a set of requirements that only appraisal firms or financial institutions can meet in terms of DB, IT structure, qualification of valuers, and a supervisory layer of control valuers. It finally requires the valuer to issue a report with a great deal of disclosure on method, comparables, extent of the inspection, and several other items, in which a LTSV must be certified by the issuer or the report; the property value must have a duration of 6 months since issuing the report… which itself is requirement for knowing which point of the real estate cycle are we in SPAIN

THE SPANISH PERSPECTIVE ON LTSV AND MLV All in all, what MO ECO defines is really a Long-Term Sustainable Value (as opposed to Market Value). Thus, MO ECO provides a certain basis of value, and it’s by no means a process of adjusting MV. What the MO ECO does provide in one of its articles is the requirement to arrive to a Mortgage Lending Value when certain circumstances arise. This is really an instrument for the appraisals firm When and when no to apply such MLV is facultative to the valuer, unless the appraisal firm identifies a consistent and clear decline on property prices in a certain area (which is expected to last more than 6 months). Only in this case the appraisal firm is obliged to apply an adjustment over the LTSV LTSV and MLV are the values of reference when REVALUING or MONITORING the collaterals of mortagages SPAIN

REAL ESTATE CYCLES Evolution of Spanish housing prices: GPD Prices (constant currency) Employment Evolution of Spanish housing prices: Economic growth phases propitiate an increase in housing prices (specially in their last years), while depression phases are characterised by a fall in prices (specially in their beginnings).

REAL ESTATE CYCLES Spanish economical behaviour during the past two cycles: GDP Employment Growth phases are distinguished by GPD growth rates of > 2%, with employment creation.

THE NORMATIVE ENVIRONMENT FOR AVMs Basically the use of AVMs is regulated by the Bank of Spain by the means of issuing Circular Letters: Circular 3/2008 del Banco de España. This Circular estabishes the capital consumption estructure, and specifically adopts AVMs Circular 3/2010 del Banco de España. This Circular establishes a new calendar of provisions for which AVMs are required Circular 4/2017 del Banco de España. This Circular further develops and allows the use of AVMs both for capital consumption and provision calculations International standards on AVM exist, but with little detail and a lack of especification on the quality validation of outcome/values obtained TEGOVA has just recently adopted the AVMs on its EVS2016 (2017 review), considerin AVMs only as a tool in the hands of an expert valuer Since 2016 the AEV (Spain’s largest Valuation asociation) has issued a Proffesional standar on AVM largely to complement and further regulate the use of AVMs by its members SPAIN

THE AEV’S STANDARD ON AVMs What TERMS OF ENGAGEMENT and further procedures are mandatory? Who is going to USE it? What MODEL is going to be used? What TYPES of assets are going to be valued? How much DETAIL is needed? What BASIS OF VALUE has to be aplied? Are the results going to be BACKTESTED? Are the overall values obtained by a certain AVM in a period of time going to be VALIDATED, ie assessed on accuracy”? SPAIN

The T-of-E & procedures MANDATORY TERMS OF ENGAGEMENT FOR UNDERTAKING AVM INSTRUCTION FROM THE CLIENT VERIFICATION OF THE DISPOSABLE DATA ANALYSIS AND SEGMENTATION OF THE PORTFOLIO USE OF THE MOST SUITED METHODOLOGIES IN THE AVM VALUATION AND ANALISYS OF OUTLIERS BACKTESTING OF EVERY PORTFOLIO OF PROPERTIES VALUED REGULAR/ANNNUAL VALIDATION OF EACH AVM ON TERMS OF ACCURACY AGAINST THE INDIVIDUAL VALUATIONS OF AEV MEMBERS DURING THE PERIOD

The user Qualified Valuer Not qualified user

Comparison of similar properties The model Comparison of similar properties Indexation Mixed models

Area < 40 sqm or > 200 sqm Area < 50 sqm or > 400 sqm Exclusion of assets SURFACE CRITERION (Pre-filter) VALUE CRITERION (Post-filter) Flat houses: Area < 40 sqm or > 200 sqm Detached houses: Area < 50 sqm or > 400 sqm 5% of extreme values

Level of detail EXAMPLE OF THE TYPICAL DATA REQUIRED TO PERFORM AN AVM Type of profeperty: residential or office space Tipology (flat, detached, etc) Surface Date of construction Plot surface Registral and cadastrial information Further documentation (original mortage valuation, etc.)

Backtesting PORTFOLIO AVM Valuations

Backtesting PORTFOLIO AVM Valuations SAMPLE Complete Valuations Random selection

Industry wide rules set by the AEV Validation of results Industry wide rules set by the AEV

AVM Categories C-3 B-3 A-3 C-2 B-2 A-2 C-1 B-1 A-1 Data quality exigence Single-element valuation Portfolio Valuation Portfolio Valuation compliant with BdE Circular 4/2017 Comparision Models C-3 B-3 A-3 Indexation Models C-2 B-2 A-2 Mixed Models C-1 B-1 A-1

Single-element valuation AVM Categories Single-element valuation Comparision Models C-3   C-3 Client’s compromise of data adequacy Usage by Qualified Valuer Whereabouts of the building Exact location of the building Unequivocal position of the asset Previous valuation (and date) Use and typology Area Construction date Plot area Itemisation of linked assets Mixed models synthesis of value Asset filter Backtesting Individual confidence level Global confidence level Valitation by qualified valuer

AVM Categories B-2 C-3 Portfolio valuation Indexation Models   C-3 Client’s compromise of data adequacy Usage by Qualified Valuer Whereabouts of the building Exact location of the building Unequivocal position of the asset Previous valuation (and date) Use and typology Area Construction date Plot area Itemisation of linked assets Mixed models synthesis of value Asset filter Backtesting Individual confidence level Global confidence level Valitation by qualified valuer

Portfolio Valuation compliant with BdE Circular 4/2017 AVM Categories Portfolio Valuation compliant with BdE Circular 4/2017 Mixed Models A-1   C-3 Client’s compromise of data adequacy Usage by Qualified Valuer Whereabouts of the building Exact location of the building Unequivocal position of the asset Previous valuation (and date) Use and typology Area Construction date Plot area Itemisation of linked assets Mixed models synthesis of value Asset filter Backtesting Individual confidence level Global confidence level Valitation by qualified valuer

Comparision Models Homogenization of comparables Value Homogenization of comparables Artificial Neural Network K-Nearest Neighbours Single-Paramete Model Hedonic Model

Indexation Models Expert Opinions Simple Aggregation Basket of goods Repeated sales

THANK YOU