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Valuation Traditional German valuation methodologies differ from those in the UK. Piet Kok delves into the background and identifies the key differences
In 1991, German banks began to undertake German-style mortgage lending abroad, refinanced through the issuance of Pfandbriefe (covered bonds). This, in turn, led to a greater reliance on valuations based on different methodologies, representing a divergence from previously established practice.
In Germany, there is a strict framework for "normalised valuations". These are based on law, directives and regulations, which in the past have made it difficult to cope with the standards used abroad. German valuers had to calculate a Verkehrswert (market value) without having a full understanding of local market standards, and, similarly, local valuers did not understand German legal requirements - compulsory for German lenders and open-ended funds. As a result, lenders used a workaround: they calculated the mortgage lending value themselves, based on a local market valuation. However, it was commonly accepted that this should not be a permanent solution.
A practical solution for lenders came in 2012. The Association of German Pfandbriefbamks (vdp) together with HypZert GmbH - the leading certification body of German valuers for lending purposes - successfully started training valuers abroad on how to estimate and determine values according to German law. However, differences in valuation approach between Germany and other jurisdictions remain.
What is "market value"?
The internationally accepted market value definition as published by RICS, TEGoVA and IVSC also applies to Germany. Although the definition within section 194 of the German Building Act (Baugesetzbuch) on the standardised market value differs slightly, it contains relevant comparable elements. The translation may not resemble the internationally accepted definition, but it does clarify that the German Verkehrswert is to be seen as the market value.
Standardised market value tBauGB §194)
The standardised market value is defined as the price that would be achieved in an ordinary transaction at the time when the assessment is made, taking into account the existing legal circumstances and the actual characteristics, general condition and location of the property or other object of assessment, without consideration being given to any extraordinary or personal circumstances.
Application of market value
The traditional German valuation approach is static, meaning that all future opportunities and risks must...