The need to adopt EVS – European Valuation Standards – in Portuguese Legislation Michael Reinberg PhD FRICS CRE REV Chairman, European Valuation Standards Board ASAVAL-TEGoVA European Valuation Conference Cascais, 18 May 2018

EVS in place of national valuation standards - the ultimate taboo In all it’s long history, TEGoVA has never aspired to replace national standards. The Mortgage Credit Directive states perfectly TEGoVA’s traditional view of the relationship between EVS and national standards: “Member States should ensure that reliable valuation standards are in place. In order to be considered reliable, valuation standards should take into account internationally recognised valuation standards, in particular those developed by the International Valuation Standards Committee, the European Group of Valuers’ Associations, the European Group of Valuers’ Associations or the Royal Institution of Chartered Surveyors ….” Mortgage Credit Directive Recital 26  I did not choose the subject and title of this talk. It was proposed to me by ASAVAL and for this I am grateful. Because it really is the ultimate taboo, and, speaking personally, I truly welcome this historic opportunity to stop hiding under the bed and address this question openly and rationally.

And yet, even though the Mortage Credit Directive is only four years old, Europe has moved on. Consider the significance of this: “Real estate should be valued in line with European Standards EVS-2012 (Blue Book) and other international standards such as the Royal Institute of Chartered Surveyors (RICS) guidelines – where a conflict is seen EVS-2012 will apply (for the avoidance of doubt – this should be considered to apply throughout the document).” European Central Bank Asset Quality Review Phase 2 Manual, Chapter 5, Collateral and Real Estate Valuation, 5.1, 4th indent, p. 144

The significance is clear The ECB’s AQR Manual concerns the most important valuation there is because poorly valued bank mortgage collateral is now recognised as a systemic component of bank failure and financial market collapse. For this most important valuation of all, the European Central Bank has decreed that national standards and even international ones, are not acceptable if they conflict with EVS. The European Banking Authority is about to do the same for valuation of non-performing exposures.

Crisis and imminent pain are not all bad – they help focus minds. Under such circumstances, it is legitimate and urgent to question the relevance of national standards The ECB cannot afford politics. It has no time for national susceptibilities about sovereignty. It has to keep the European house from burning down and for that it needs simplicity and clarity. It needs one set of valuation standards, not 28 or even the 19 of the Eurozone countries. Crisis and imminent pain are not all bad – they help focus minds. What actually is the justification for 28 national valuation standards in an EU with an Internal Market and a Banking Union? As a European Commission official once said to a TEGoVA delegation: « What’s the problem? A house is a house! »

If you look at the content of valuation standards: EVS 1 Market Value EVS 2 Valuation bases other than market value EVS 3 The Qualified Valuer EVS 4 The Valuation Process EVS 5 Reporting the Valuation EVS 6 Automated Valuation Models What is the special national economic culture that justifies a special, separate national valuation standard? An Austro-Hungarian K und K Market Value? A Portuguese Valuation Process? What reason could there be apart from simple historical divergence?

Has anyone bothered to consider the ‘cost of valuation non-Europe’ the way the Ceccini report did for the whole European economy thirty years ago leading to the completion of the Internal Market? What is the cost of developing and enforcing 28 different sets of standards? What is the use, when as soon as it rains the ECB and EBA step in and impose EVS? I’m not ‘telling you how it is’. I’m opening a debate. Let’s talk about it.

You might say, “Why stop at Europe You might say, “Why stop at Europe? Why not international valuation standards?” Because valuation standards cannot be divorced from the dominant economic and regulatory environment and here that means the EU. Probably a big reason why EVS was given primacy in the first place is because the definitions and concepts that permeate it are totally in sync with EU law. Definitions or concepts so fundamental as ‘Market Value’, ‘Mortgage Lending Value’ or ‘the independence of the valuer’ in EVS are all grounded in EU law and indeed EVS reviews all EU law impacting real estate and valuation and it has Guidance Notes entirely founded on EU law such as: EVGN 6 Cross-border Valuation EVGN 7 Property Valuation in the Context of the Alternative Fund Managers Directive EVGN 8 Property Valuation and Energy Efficiency

“L’Europe qui protège” What is the single greatest purpose of the Union? To protect its citizens. How did valuation come out of nowhere, overnight, to be at the centre of EU politics and regulation? Because politicians and regulators woke up to the systemic risk caused by bad valuation. EVS is designed to meet the EU regulator’s concerns and protect EU citizens. Our current work is centred on: An EVS-compliant Valuation Report that ensures that valuers do what is necessary to reach a reasoned and justified estimation of value and are not handicapped by ‘tick-box’ valuation reports. Investigating the use of stand-alone, ‘valuer-free’ Automated Valuation Models for individual properties and proscribing it, as these ‘black boxes’ are truly dangerous both for individual mortgage-borrower citizens and systemically for financial and housing markets. . The EVS-compliant Valuation Report: « My EVSB colleague Cédric Perrière will present this to you shortly » . AVMs: «TEGoVA Chairman Krzysztof Grzesik will address this shortly. »

The bottom line is worth repeating: Valuation standards cannot be divorced from the dominant economic and regulatory environment and here that means the EU Do you think that American appraisers use International Valuation Standards? They use their own USPAP – Uniform Standards of Professional Appraisal Practice. What do you think the Chinese are going to do? Take a wild guess. The European Union is the greatest economic power on earth. Despite all the talk, it is uniting faster than ever. The other day, the boss of one of the biggest French property investment companies said « We need a European commercial lease! » We need European Valuation Standards just as much.

This is not a revolution and we are not agitators Europe is not built in a day and national valuation standards will surely be around for some time. We are proud that our standards are the official, legal EU template for national valuation standards and we are not pushing for the disappearance of national standards. But if an EU and Eurozone government such as Portugal’s takes the rational decision to simply adopt EVS and spare itself and its market players the confusion and waste of national standards, we shall welcome it and help in any way we can.