New Polish law concerning valuations for loan security purposes
The Polish Federation of Valuers Associations (PFVA) has achieved a breakthrough in persuading the Minister of Infrastructure to approve a new standard concerning „Valuation for Loan Security Purposes”. The Minister communicated his approval on 4th January 2010 and as a result the PFVAs „Standard KSWS 3” has become enshrined in Polish law.
By way of background The Statute on Real Estate Management 1997 and the Ordinance of the Council of Ministers concerning the valuation of property and valuation reporting 2004, regulate almost every aspect of the property valuation profession and practice in Poland.
In addition the Polish Federation of Valuers Associations (PFVA) publishes its „Green Book” of Valuation Standards titled: „General National Principles of Valuation” (Powszechne Krajowe Zasady Wyceny PKZW). The latter are divided into Basic National Valuation Standards (Krajowe Standardy Wyceny - Podstawowe or KSWP) and Specialist National Valuation Standards (Krajowe Standardy Wyceny Specjalistyczne or KSWS). The currently published standards are as follows:
KSWP 1 - Market Value and Depreciated Replacement Cost
KSWP 2 - Values Other than Market Value
KSWP 3 - The Valuation Report
KSWS 1 - Valuation Standards for Public Purposes
KSWS 2 - Valuation for Financial Reporting Purposes
KSWS 3 - Valuation for Loan Security Purposes
Under The Statute on Real Estate Management 1997, valuation standards such as the above may become binding under Polish law only once they are formally agreed with the Minister of Infrastructure. Standard KSWS 3 is the first such standard to have been agreed with the Minister.
Whilst the new standard is only 4 pages long, it is likely to prove revolutionary in terms of the way valuations are reported to the banks. Under the new standard, which also has the backing of the Polish Banking Association, market value continues to be the basis of value for all loan valuations. However from now on, in addition to expressing a well supported opinion of value, the valuer must also provide a separate assessment of the risks associated with the property being valued, in terms of predicted future changes in the market. Thus for the first time, valuers are required by law to forecast future market conditions albeit stopping short of predicting future value. Paragraph 4.3 of KSWS 3 states „The valuer has the obligation on the basis of available sources and market knowledge to point out areas of risk associated with the property being valued, including foreseeable changes in the given market as well as the risk associated with the assessment of the subject property by investors together with a general opinion about the direction of the influence of the above on the value of the property being valued in the future. The above additional information is to be set out in the form of an attachment to the valuation report”.
Also of interest is paragraph 4.4 which appears to encourage banks to instruct valuers to prepare a „sensitivity analysis” „…which will allow for a fuller assessment of risk of accepting a concrete property as the subject of loan security. The sensitivity analysis sets out the sensitivity of the value of the subject property to changes in variable inputs, influencing such value”.