NPL Best Practice: The assessment

How are pledged real estate properties and mortgage credits assessed?

It is quite complex, since in our Country it is difficult to price a real estate on a free market , and this controversial issue is often debated by accountants, technicians, owners and asset valuers. The assessment are rather uneven. Moreover, we must also consider pledged or potentially attachable properties, which are subjected to countless possible complications, such as: unknown occupancy, uncertain timing of the release, poor knowledge of the property conditions, lack of well-defined timing and costs of all the required procedures, uncertainty about the receipt of the payment.

Therefore, considering the above, all the parties involved generally express divergent views; this leads to the ill-famed “bid-ask gap”, at least with regard to mortgage credit.

Then, what are the most appropriate assessment criteria? The answer is very simple: the appropriate price is always determined by the market.

In order to assess any investment, we must take into account the resulting income. When it comes to real estate properties, we must consider the rent, while mortgage credits require a more complex analysis which includes all the above-mentioned factors; however, the decisive element is always the ability of the asset to generate long-term profits.

Therefore, the actors in this market must combine all the variables on the reference property market (including also the common downwards bidding, for example) with the peculiar aspects and uncertainties of debt collection and legal procedures, at the same time assessing each of these variables with the purpose of understand which of them exert an actual impact on the asset in question.

Considering equal properties, the burden arising from enforcement proceedings or agreements radically changes the recovery scenarios. The same argument applies to, for example, the occupancy of a property: in fact, the occupancy status may alter the commercial appeal and value of the asset. Eventually, the intended use of the property as well as any possible change greatly affect the decision of the target customers. This list could be much longer.

The asset valuers appointed by the court and (unfortunately) many operators in this sector distinguish the open market value (OMV) from the judicial market value (JMV) of the property (to be) pledged through simple flat-rate deduction percentages. This approach could be applied in case of oversupply depreciation, but it does not provide accurate assessments. Conversely, the GMA assessment, which is currently undergoing certification and is managed by dedicated software, takes into account all the “judicial” variables affecting likely to individually affect the price; this allows the customers and the operators to control the operations and develop a customised recovery strategy for each asset.

 Emanuele Grassi