1. 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

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

3. 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

4. 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

5. 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).

6. 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.

7. 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

8. 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

9. 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

10. The user
Qualified Valuer
Not qualified user

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

12. 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

13. 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.)

14. Backtesting
PORTFOLIO
AVM Valuations

15. Backtesting PORTFOLIO AVM Valuations SAMPLE Complete Valuations
Random selection

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

17. 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

18. 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

19. 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

20. 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

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

22. Indexation Models Expert Opinions Simple Aggregation Basket of goods
Repeated sales

23. THANK YOU