The Mortgage Lending Value A Critical Analysis PDF

THE MORTGAGE LENDING VALUE – A CRITICAL ANALYSIS
Master Thesis
University: Amsterdam School of Real Estate
Study: Master of Science in Real Estate
Student G.J.W. Wesselink MA
Student number: 2023471
1st assessor: drs. A. (Arthur) Marquard
2nd assessor: dr. F. (Fred) Huibers
PREFACE
This thesis has been submitted in fulfilment of the requirements for a Master of Science in Real Estate
degree at the Amsterdam School of Real Estate. The topic of this research, the Mortgage Lending Value
(Beleihungswert, further MLV), inspired me, as real estate financing was still possible, by means of German
Pfandbriefe, when I was at the beginning of this research in September 2013, whereas Dutch and
international banks in general where cautious and withdrawing from financing real estate. The issuance of
German Pfandbriefe is bound by the regulations of the German Pfandbrief Act (PfandBG) and the
determination of a Mortgage Lending Value is a precondition for these banks for finance of properties and
re-finance of property loans by issuing Mortgage Pfandbriefe. To understand the MLV philosophy it proved
to be necessary to enrol in the training course: “Determination of Mortgage Lending Valuation (MLV)” at
the vdp PfandbriefAkademie GmbH - School of Real Estate Finance that is linked to the Association of
German Pfandbriefbanken (further VDP). I successfully completed this course by undertaking the CIS
Hypzert (MLV) exam in October 2014.
The writing of this thesis outside normal working hours was a challenging and relatively lengthy process
however, now that I completed, I can only say that it was definitely worth it. Since the start I learned a lot,
got inspiration by so many new ideas and met many new people and friends. This research would not
have been possible without the help of numerous colleagues within the Real Estate Industry. They inspired
me through sharing their thoughts, expertise, data and other information. I would like to thank all these
people but in particular I would like to thank Drs. A. Marquard for his support and guiding me through
this research. I would also like to thank my direct colleagues Roderick and Walter for the insightful and in-
depth discussions we had on the MLV principle and calculations. Finally I would like to thank Mark Fidler
who took the time and effort to proofread my master’s thesis.
MASTER THESIS: G.J.W. WESSELINK
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Table of Contents
Preface 2
Abstract 4
1 Problem analysis and research design 5
1.1 Introduction 5
1.2 Reason & motivation for research 5
1.3 Relevance 5
1.4. Problem formulation 6
1.5 Aims and objectives 6
1.6 Central research question 6
1.7 Research design 6
1.8 Methodology 7
1.9 Chapter structure 7
2 Theoretical framework 8
2.1 Introduction 8
2.2 History and background Pfandbrief system 8
2.3 Pfandbrief as a financing instrument 9
2.4 Size of German Pfandbrief market 11
2.5 Mortgage Lending Value (MLV) 15
2.6 The determination of the MLV 17
Section 1 Income Approach (§8 up to §13) 17
Section 2 Cost Approach (§14 up to §18) 19
2.7 Security provided to investors by MLV 21
3 Real estate market characteristics The Netherlands vs Germany 23
3.1 Introduction 23
3.2 Real Estate Characteristics 23
3.3 Dutch & German Real Estate Market 25
4 Case studies selected office building focuss on MV and MLV. 30
4.1 Introduction 30
4.2 Selected properties. 30
5 Conclusion / Is the MLV a true sustainable value 47
6 Reflection and recommendations 49
Bibliography / sources of information 50
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ABSTRACT
Since the outbreak of the great financial crisis in 2008, banks in general are cautious to finance real
estate, resulting in limited to no financing options for real estate and significantly higher risk premiums.
This had and still has a huge impact on the Dutch property market. In the current market real estate
market (2013-2014), real estate financing is still possible by means of German Pfandbriefe, a (re-)
financing instrument that appears to defy the current crisis. The Pfandbrief, a type of covered interest-
bearing bond that is issued by German Pfandbriefbanks, is an alternative source of real estate financing.
The legal basis for issuing Pfandbriefe is stated in the Pfandbrief Act. The Pfandbrief Act is supplemented
by several regulations in order to ensure a high standard of security to investors. One of the central pillars
that should provide safety to investors is the concept of MLV and the fact that property financings may be
included in cover only up to the a limit of 60 % of the MLV. According to the Pfandbrief Act the principle of
the determination of the mortgage lending value is:
“The value on which the lending is based (mortgage lending value) is the value of the property which
based on experience may throughout the life of the lending be expected to be generated in the event of
sale, unattached by temporary, e.g. economically induced, fluctuations in value on the relevant property
market and excluding speculative elements.(2) To determine the mortgage lending value, the future
marketability of the property is to be taken as a basis within the scope of a prudent valuation, by taking
into account long-term sustainable aspects of the property, the normal and local market conditions, the
current use and alternative appropriate uses of the property.” (VDP, 2015, p. 50
This paper investigates whether the MLV is a (necessarily) truly sustainable value for (specific) real estate in
The Netherlands and serves its proposed objectives given specific characteristics of the Dutch real estate
market.
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1 PROBLEM ANALYSIS AND RESEARCH DESIGN
1.1 Introduction
The objective of this chapter is to present the framework of my research and will start with the reason and
motivation together with the relevance of my research. This will be followed by the problem formulation
and the corresponding central research question and aims and objectives. Next the research design and
methodology will be addressed and why these where chosen. Finally this chapter finishes off with an
outline of the structure of the research.
1.2 Reason & motivation for research

Real estate plays an important role in bank lending and the real estate market in The Netherlands is highly
dependent on financing by banks. Since the outbreak of the great financial crisis in 2008, banks in
general are cautious to finance real estate, resulting in limited and in some cases no financing options for
real estate and significantly higher risk premiums. This had and still has a huge impact on the Dutch
property market. In the current market real estate market (2013-2014) I note that real estate financing is
still possible by means of German Pfandbriefe, a (re-) financing instrument that appears to defy the current
crisis. In my current position, I work as an appraiser and determine values for different purposes of a wide
range of properties throughout The Netherlands. These appraisals generally address the MV of properties
but CBRE is increasingly asked to provide the MLV of properties. Property valuation is widely covered in
literature but I noticed that literature on the MLV according to the provisions of the
Beleihungswertermittlungsverordnung is limited. Before starting my research I contacted several
professionals in The Netherlands and Germany to share some thought about the MLV, these calls affirmed
that the MLV is a challenging and interesting topic for research.
1.3 Relevance
The scientific relevance of this research is present. There is sufficient basic information available on the
Pfandbrief system in Germany. However abroad and to be more specific in The Netherlands this subject is
unknown for most real estate professionals and literature on the MLV topic is limited. Since financing by
means of German Pfandbrief in the current real estate market is an opportunity it is important to raise
awareness of this subject in The Netherlands. The most essential element of the Pfandbrief system is the
MLV that has to be determined in conformity with the detailed statutory provisions that are stated in the
German Pfandbrief Act. The MLV is aimed to be a very conservative value that, according to the VDP,
should show shows as little fluctuation as possible (VDP, The Pfandbrief 2013 - 2014 Facts and Figures,
p. 12). In addition the MLV must not exceed, and indeed is usually lower than, the MV (VDP, ibid). This
implies that the MLV is more or less fixed and consequently is particularly effective for relatively static real
estate markets.
Given the fact that the real estate market in The Netherlands has witnessed a severe downturn in recent
years resulting in serious declines of MV’s, with value fluctuations of minus 45% since the beginning of
2008 (CBRE research, 2014) being no exception it is crucial to investigate if the MLV guarantees its
proposed objective.
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1.4. Problem formulation

It is clear that the MLV is an essential element to ensure security to investors in the German Pfandbrief.
Furthermore it is clear that financing by means of German Pfandbriefe in the current real estate market is
an opportunity for Pfandbrief banks given the virtual standstill in financing. An accurate determination of
the MLV is therefore crucial and current.
Given the fact that the MLV must be determined in conformity with detailed statutory provisions of the
German Pfandbrief Act I have little doubt if the method is followed correctly. However, I do question if the
MLV actually guarantees its proposed objective. This question arises from the fact that the MLV is more or
less fixed due to the statutory provisions and assumptions and leaves no scope for very specific
characteristics of a real estate market, amongst others the Dutch market. This problem is also recognised
by Crosby et al (2011, p. 8) as they criticise the definition and application of MLV as (1) having no
economic basis and (2) being incapable of objective analysis due to the variety of different interpretations,
which can be applied, to each element of the definition. The fundamental question is whether a system of
German origin can function as affectively in a non-German market.
1.5 Aims and objectives

The aim of this research is to carry out a critical analysis of the MLV with a view to ascertaining the
suitability of the MLV for its stated objectives in The Netherlands given the characteristics of the real estate
market in The Netherlands.
The objectives are as follows:
1) Provide more insight in the MLV and the determination of the MLV;
2) Investigate the proposed objective of the MLV;
3) Investigate if the MLV may be considered as a sustainable value in The Netherlands;
4) Research if the MLV guarantees the necessary security to investors under the current provisions in
The Netherlands;
5) Conclude whether or not the MLV is suitable for its proposes objectives for the Dutch market;
6) If not, provide recommendations on the MLV.
1.6 Central research question

Is the MLV under the current provisions of the Pfandbrief Act suitable for its proposed objectives in The
Netherlands?
To arrive at an answer to the central question, the following sub questions where formulated:
1) What does MLV stand for?
2) How is the MLV determined?
3) What are the proposed objectives of the MLV?
4) Is the Dutch real estate market subject to fluctuations in value?
5) Do the stated provisions guarantee that the MLV serves its proposed objectives given specific
characteristics of a real estate market?
1.7 Research design

The research qualifies as an exploratory study.
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1.8 Methodology
The methodology of my research comprises of the following:
Primary information on the MLV subject, loan security and characteristics of the Dutch real estate market is
gathered by a literature search and during the training course “Determination of Mortgage Lending
Valuation (MLV)” which I enrolled and completed to understand the MLV philosophy better.
As mentioned previously the literature on the MLV is scarce. Expert consultations where conducted in order
to compliment the theoretical framework. The aim of these consultations was to ascertain issues with the
value definition MLV when set against specific characteristic of the Dutch real estate market.
The characteristics and market development of The Netherlands and Germany where compared to prove
whether the markets have showed a similar pattern and movements during the crisis. This is a necessary
intermediate step to find out if the MLV, which is a sustainable long-term value, is more suitable for the
one or the other market.
A selection is made of properties (suitable for Pfandbrief financing) that have been sold pre-crisis and
during the crisis. This is done to conclude their MV’s at the respective dates.
The MLV’s of these properties are then determined per the transaction date (pre-crisis). These calculations
comply with the detailed statutory provisions of the German Pfandbrief Act and are based on the pre-crisis
market conditions. After the determination of the MLV’s the outcome can be compared to the actual
transaction prices achieved during the crisis. This outcome will demonstrate whether the MLV is suitable as
a sustainable value in The Netherlands bearing in mind that according the theory the MLV must not
exceed, and indeed is usually lower than, the MV.
1.9 Chapter structure

The chapters will be outlined as follows.
The first chapter will present the framework of my research.
Chapter two will comprise the theoretical framework and focuses on the history and background of the
MLV, the Pfandbrief as a financing instrument, the size of the Pfandbrief market, the MLV and its
determination and the security provided by the MLV to its investors.
Chapter three sets out real estate market characteristics, the Dutch real estate market and the German real
estate market.
Chapter four will present several case studies of selected office building in Amsterdam and focusses in
particular on their MLV in relation to the transaction price (MV) achieved during the crisis .
Chapter five will conclude whether the MLV is a (necessarily) truly sustainable value for (specific) real estate
in The Netherlands and serves its proposed objectives given specific characteristics of the Dutch real estate
market. Conclusively chapter five we will provide the overall findings and if applicable recommendations
for the improvement of the value definition MLV in order to increase the guaranteed safety to Pfandbriefe
creditors.
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2 THEORETICAL FRAMEWORK
2.1 Introduction
This chapter presents the theoretical framework of this dissertation. In this chapter the reader will be
introduced to the Pfandbrief system. This chapter will start with the background and history of the
Pfandbrief system, which will be followed by an explanation of the Pfandbrief as a financial instrument.
Next the chapter will focus on the importance of the Pfandbrief market by addressing the overall size of the
German Pfandbrief market and the volume of loans in The Netherlands. Finally, as the MLV is an essential
element in Pfandbrief financing, the determination of MLV and the proposed objectives (providing security
to investors) of the MLV will be discussed in depth.
2.2 History and background Pfandbrief system

It is widely regarded that the roots of the German Pfandbrief system reaches back to the year 1769 when
Prussia was in the aftermath of the Seven Years War (1756-1763) (Fabozzi, F.J., 2008, p 296). At this
time, the country was ravaged and there was a severe credit shortage in Prussia. It was king Frederick II
(known as The Great, ruled 1740-1786) that introduced the Pfandbrief system with a ”cabinets-order”
(European Association for Banking Industry, 1994, p. 403). On the basis of this royal ruling Prussia set up
so-called ”Landschaften” that facilitated the refinancing of loans to their members. These Landschaften
could best be described as compulsory public-law associations of noble landowners throughout Prussia,
these functioning as mortgage credit institutions. To refinance loans the Landschaften issued debentures.
Debentures where the precursor of the present-day mortgage bond and were registered as a charge on
the estate on which the loan was granted and ensured the creditor in the event of a default had a direct
charge over the estate which the landowner put up as collateral were jointly backed by all members of a
Landschaft.
The Pfandbrief system was adopted rapidly as a financing instrument throughout Europe. A major impulse
for the present-day format of the Pfandbrief system was the foundation of institutions outside Prussia such
as Crédit Foncier de France, a national mortgage bank of France that was established by a governmental
decree in 1852 and empowered the issue of loans at interest rates, secured by mortgage bonds. This was
the first step towards a private-law mortgage bank where issuers where not law associations but private
real estate credit institutions. This was the second-generation Pfandbrief system, the system that was
initially used to finance agriculture and specific properties was now used for the refinancing loans of the
public sector and loans guaranteed by the public sector. This new variation was also used to finance the
rapidly expanding towns and cities in the Industrial Revolution and the associated urbanisation during the
later half of the 19th century.
The first German mortgage bank that issued Pfandbriefe is The Frankfurter Hypothekenbank. This bank
was established by a decree of the senate in 1862 and the first Pfandbrief was issued in 1863. The
Pfandbrief was traded in small-denomination issues on the Frankfurt am Main stock exchange in order to
attract small amount savings for financing housing construction. Numerous other private mortgage banks
followed in succession until by the end of 1897 a total of 40 private mortgage banks existed (VDP,
Mortgage Bank Act (in force until 2005), available at http://www.pfandbrief.de).
Until then there were no uniform German regulations that guaranteed the issuance and the structuring of
Pfandbriefe by the mortgage banks but eventually these developments led in Germany to the German
Mortgage Bank Act (Hypothekenbankgesetz, HBG) that came into force in 1900. The basis of this law may
be seen in the statutory requirements for the Prussian mortgage banks of 1863 and its improvements in
the year 1867 and 1893. In Prussia, only mortgage banks that subjected themselves to legal requirements
stipulated by the Ministries responsible for the awarding of mortgage bank licenses were to receive the
license and the right to issue Pfandbriefe.
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2.3 Pfandbrief as a financing instrument

There are several ways for banks to raise capital. The most obvious way is the savings account. In addition
to savings accounts a banks can raise money by issuing debt securities such as:
 Bare bonds;
 Covered bonds
 German mortgage – backed bonds.
A bank issuing a bare bond as a fixed-interest security is liable on the basis of its legal assets. Thus both,
the creditworthiness and the legal assets of a bank will influence the risk and inherent with the risk the
premium in the calculation of the interest. Covered bonds get higher ratings than notes sold by banks and
pay less in interest because they strengthen the issuer's repayment guarantee with assets that can be sold
in a default.
Pfandbrief
A German Pfandbrief is a type of covered interest-bearing bond that is issued by German
Pfandbriefbanks. These banks are credit institutions that comply with the legal license requirements of the
German Pfandbrief Act (Pfandbriefgesetz – PfandBG) (VDP, 2014). German Pfandbriefbanks can provide
funding for real estate, public works, ships and aircraft. The Pfandbriefbanks provide funding by issuing
Pfandbriefe on the capital markets. These Pfandbriefe are best compared with covered bonds.
According to the European Covered Bond Council (further ECBC) covered bonds are debt instruments
secured by a cover pool of mortgage loans (property as collateral) or public-sector debt to which investors
have a preferential claim in the event of default (available at http://www.ecbc.eu). In addition to this
preferential claim there are other safety issues such as asset eligibility and coverage, bankruptcy-
remoteness and regulation (depending on the framework under which the covered bond is issued). Due to
these safety aspects covered bonds are increasingly used as a funding instrument. As a consequence, new
covered bond legislation and updated existing rules have been introduced in various European countries.
The legal basis for issuing Pfandbriefe is stated in the Pfandbrief Act. The Pfandbrief Act is supplemented
by several regulations in order to ensure a high standard of security to investors.
The figure below illustrates the common bond and Pfandbrief structure:
Figure 1: Common covered bond structure
Source: VDP, The Pfandbrief 2007 - 2008 Facts and Figures, p. 46 (original source Merrill Lynch)
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The really essential element in this structure, which gives the structure its power, is the isolation of the cover
pool and the pertaining covered bonds from the balance sheet of an issuer if the latter defaults. In other
words, the cover pool and the covered bonds are shielded from a bank’s other obligations and credits in
case it becomes bankrupt.
Interest rates
Due to the risk-averse practice the Pfandbrief system is widely considered almost risk free. Crimann and
Rüchardt also contend that the Pfandbrief that complies with the quality requirements of the Pfandbrief Act
is an attractive source of refinancing for lending business as well as an interesting investment vehicle for
investors. (2009, p. 27). According to the VDP no bank has missed a payment on the securities in at least
100 years and it’s history of security results in extremely low interest rates. This is also affirmed by Fabiozzi
(2009, p. 528) as he states that there has not been a bankruptcy proceeding against a mortgage bank
since the enactment of the Mortgage Bank Act. On the other hand the VDP stresses that, in some cases,
Pfandbriefe even pay a yield pick-up above bonds of smaller European states, even though these are rated
lower than Pfandbriefe (available at http://www.pfandbrief.de), this fact makes the Pfandbrief in terms of
return an interesting investment vehicle. The graph below displays shows the development of the 5, 10
and 15 years to maturity rates in the period 2009 to 2014. Publication of the vdp Pfandbrief curves where
discontinued as of 1 April 2014.
Graph 1: Refinancing Interest rates for Pfandbriefbanks

5,00
4,75
4,50
4,25
4,00
3,75
3,50
3,25
3,00
Interest rate in %
2,75
2,50
2,25
2,00
1,75
1,50
1,25
1,00
0,75
0,50
1-1-2009
1-4-2009
1-7-2009
1-1-2010
1-4-2010
1-7-2010
1-1-2011
1-4-2011
1-7-2011
1-1-2012
1-4-2012
1-7-2012
1-1-2013
1-4-2013
1-7-2013
1-1-2014
1-4-2014
1-10-2009
1-10-2010
1-10-2011
1-10-2012
1-10-2013
5 Year Maturity 10 Year Maturity 15 Year Maturity
Source: VDP, statistics/ CBRE Germany

Interim conclusion
Given the characteristic and security of the Pfandbriefe, it is statistically evident that Pfandbriefbanks are
able to obtain an exceptionally lower cost of funding when granting mortgage loans for real estate and
public debt with investors have the advantage of investing in “safe” bonds with a relatively high return.
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2.4 Size of German Pfandbrief market

In their domestic (German) market the VDP member institutions are leading the commercial property
finance market. According to numbers of the VDP the member institutions held by the close of 2012
market shares of approximately 30% in residential property finance and 60% in commercial property
finance (total mortgage loans outstanding end 2012, 672.9 billion).
Also abroad Pfandbrief banks are important providers of residential and commercial property finance as
well as finance for public-sector activities. This paragraph will focus on the Pfandbrief Bank’s lending
business with a particular focus on lending activities abroad.
Outstanding loan amounts in 2012 and 2013

According to numbers of the VDP outstanding real estate, public sector, ship and aircraft loans held by
VDP member banks stood at circa € 1,269 billion at the end of 2013 (VDP, 2014). This represents a
decline over the year of circa 8.5%. With the exception of residential property financing there were
significant falls in all other segments.
The table below shows how the total outstanding loan portfolio is broken down:
Table 1: Outstanding amounts under loans granted by Pfandbrief Banks in 2012 – 2013
2012 2013 CHANGE IN %
€ BILLION € BILLION
Real estate financing 672.9 632.3 -6.03%
of which Residential property financing 373.3 371.0 -0.63%
of which Commercial property 299.6 261.3 -12.78%
financing
Public sector lending 599.4 537.3 -10.36%
Ship financing 84.7 73.9 -12.75%
Aircraft financing 31.1 25.7 -17.36%
Total loans 1,388.1 1,269.2 -8.57%
Source: VDP, statistics
Of the approximately € 630 billion (circa 50%) of the total outstanding 2013 loan amount granted by
Pfandbrief Bank’s on real estate, circa 59% was residential property lending and circa 41% was
commercial property lending.
Cover business
Given the required protective measures to safeguard investors in a Pfandbrief, property financings may be
included in the cover pool only up to mortgage lending limit of 60% of the prudently calculated MLV. Out
of the total real estate loan portfolio, € 230.2 billion (circa 36.4 %) was used as cover for Mortgage
Pfandbriefe.
The mortgage lending limit of 60 % of the MLV does not mean that a loan, to be eligible as cover, may
not exceed the 60 % limit. Only the part of the loan that serves as cover may not exceed this limit. This can
be achieved by dividing the loan into two parts – one up to the 60% limit and the other above it. Or to
structure the loan in two separate parts a senior debt and a mezzanine debt. For a clarification please see
the example of a stretched loan and capital structure including mezzanine in the figure below, based on a
€ 75 million debt provision and a € 25 million equity input.
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Figure 2: Risk-/Return relation “Stretched Senior vs. Mezzanine
Pfandbrief lending has become increasingly widespread outside of Germany. The table below shows how
the real estate loan portfolio is currently allocated:
Table 2: Real Estate Financing

MORTGAGE LOANS COVER ASSETS INCLUDED IN COVER
€ BILLION € BILLION IN %
Total 632.3 230.2 36.4%
Germany 508.8 183.5 36.1%
Outside Germany 123.5 46.7 37.8%
(share outside Germany) 19.5% 20.3%
The numbers above indicate that the share of loans used as cover was roughly the same abroad as in
Germany. According to the VDP the 51.5% of cover assets relate to residential property and 48.5% relate
to commercial property, this being mainly office and retail premises.
The figure below provides a breakdown in cover assets by property type:
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Figure 3: Distribution of mortgage loan cover assets by property type
0.50% Other commercial

11.50%
22.80%
Retail buildings
15.50% Office buildings
Condominiums
Single-family and two-

family houses
20.10%
Multi-family houses
21.50%
8.10% Other residential
Mortgage lending cover assets by country

From the total outstanding real estate covered loans 46.7 billion (circa 20%) is secured by cross border
real estate. The table below shows how the covered real estate loan assets are allocated:
Table 3: Geographical allocation covered real estate loan assets

COVER ASSETS SHARE IN TOTAL
€ BILLION IN %
Germany 183.5 79.7%
France 9.9 4.3%
UK 7.5 3.3%
Netherlands 4.6 2.0%
USA 4.2 1.8%
Spain 3.4 1.5%
Poland 3.1 1.3%
Switzerland 2.8 1.2%
Italy 2.6 1.1%
other countries 6.4 2.8%
Total 230.2
The numbers above demonstrate that by 2013 the major international markets for Pfandbrief Bank’s are
France, the United Kingdom and The Netherlands with shares of total mortgage loan cover of 4.3%, 3.3%
and 2.0%, respectively.
Commercial property financing outside Germany in 2013.

In 2013, € 114.7 billion (circa 43.9%) from the total outstanding commercial property loans (cover assets
and non-cover assets excluding residential loans) concerned cross border commercial property loans. The
table below illustrates the distribution of new cross border commercial property loans in 2013 and the
total of cross border outstanding commercial property per year-end 2013.
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Table 4: Commercial property financing outside Germany in 2013

NEW LOANS 2013 OUTSTANDING LOANS AT YEAR-
END 2013
€ million Share in % € million Share in %
Austria 263 1.3 1.225 1.1
Belgium 318 1.6 1.761 1.5
Cyprus 0 0.0 65 0.1
Czech Republic 450 2.3 1.718 1.5
Denmark 24 0.1 843 0.7
Estonia 0 0.0 95 0.1
Finland 173 0.9 2.117 1.8
France 3.599 18.2 22.093 19.3
Greece 0 0.0 170 0.1
Hungary 33 0.2 987 0.9
Ireland 0 0.0 120 0.1
Italy 160 0.8 4.81 4.2
Lithuania 0 0.0 6 0.0
Luxembourg 88 0.4 1.23 1.1
Netherlands 1.571 7.9 8.426 7.3
Poland 1.568 7.9 6.285 5.5
Portugal 1 0.0 1.971 1.7
Romania 64 0.3 760 0.7
Slovakia 70 0.4 164 0.1
Slovenia 69 0.3 128 0.1
Spain 206 1.0 8.883 7.7
Sweden 1.047 5.3 3.704 3.2
United Kingdom 5.364 27.1 22.61 19.7
EU total 15.068 76.2 90.171 78.6
Canada 55 0.3 923 0.8
Iceland 1 0.0 279 0.2
Japan 30 0.2 595 0.5
Norway 0 0.0 26 0.0
other countries 283 1.4 3.564 3.1
Switzerland 18 0.1 1.167 1.0
USA 4.311 21.8 18.001 15.7
Non-EU total 4.698 23.8 24.555 21.4
Grand total 19.766 100.0 114.726 100.0
In terms of new loans the UK followed by the USA and France where the counties that are responsible for
the highest percentage share of new commercial property loans abroad in 2013 (roughly two thirds of
new loans). In terms of outstanding commercial loans at year-end the UK followed by France and the USA
have the highest share at year-end 2013.
Interim conclusion
The Pfandbriefbanks play not only in their domestic market but also abroad an important role in the
property lending industry. In terms of new loans transactions 2013 statistics show that, broadly speaking,
The Netherlands is a significant market and an important target country for German Pfandbrief Banks.
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In terms of outstanding loans at year-end 2013, The Netherlands is fifth largest and a country in which
German Pfandbrief Banks have a very high exposure.
In 2013 outstanding cross border loans amounted to € 8.4 billion or 7.3% of total outstanding cross
border loans including new commitments of € 1.6 billion).
Given the fact that the total commercial investment turnover in the Dutch market in 2013 was circa € 5.3
billion (estimation CBRE) the total commitments of Pfandbrief banks are extensive. It should be noted that
these numbers do not solely concern covered commercial real estate loans however, but the total
commercial loans outstanding by Pfandbrief Banks.
2.5 Mortgage Lending Value (MLV)

In the real estate industry there are a number of different valuation principles and corresponding valuation
methodologies, depending on the purpose for which the valuation is required. The value most commonly
required is a property's Market Value (further MV).
German banks usually also require a MLV in the process of granting a mortgage loan. The MLV is
intended to be a sustainable long-term value based on a lending perspective, whereas the validity of a MV
is limited and based on a fixed date. The MLV valuation principle has been in use for lending purposes in
Germany for decades and is at the present time more and more applied by German banks for cross-
border property finance transactions. Besides, the determination of a MLV is one precondition for
Pfandbrief Banks to be able to refinance property loans by issuing Mortgage Pfandbriefe.
The MLV valuation principle is now recognised by the financial service industry in many countries and by
various acknowledged institutions and governmental bodies. On a European level, EU Directive 98/32/EC
on the solvency ratio for credit institutions drawn up European Parliament in 1998 foresees the following
clear definition of MLV:
“The mortgage lending value shall mean the value of the property as determined by a valuer making a
prudent assessment of the future marketability of the property by taking into account long-term sustainable
aspects of the property, the normal and local market conditions, the current use and alternative
appropriate uses of the property. Speculative elements shall not be taken into account in the assessment of
the mortgage lending value. The mortgage lending value shall be documented in a transparent and clear
manner.” (p. 2).
The concept of MLV is also recognised by the International Valuation Standard Council (further IVSC) and
was adopted as a non-market based assessment in the International Valuation Standards (IVS 2).
IVSC outlines the MLV as a “ value at risk” concept and recognises that this concept is used in a number of
European countries for lending purposes. In addition the European Group of Valuers’ Associations
(TEGOVA) adopted it as a valuation base other than MV in their European Valuation Standards.
According to the European Mortgage Federation (EMF), the MLV facilitates the assessment of whether a
mortgaged property provides sufficient collateral to secure a loan over a long period and thus reflects the
long-term value of a property. Therefore the MLV cannot be grouped together with other valuation
approaches that are based on MV that are taken on a fixed date (spot MV’ss) (2009, p. 145).
In Germany the determination of the MLV is subject to detailed statutory provisions that are stated in the
German Pfandbrief Act. This act provides an section that covers regulations on the determination of the
MLV (named: Beleihungswertermittlungsverordnung – BelWertV, translated Mortgage Lending Value
Regulation) (VDP, 2014, p.48). The Pfandbrief Act originates from 2005 and replaced the previous
discussed Mortgage Bank Act (Hypothekenbankgesetz) dating from 1900.
15
In paragraph three of the Mortgage Lending Value Regulation the following principles on the
determination of the MLV are defined:
1) The value on which the lending is based (mortgage lending value) is the value of the property which
based on experience may throughout the life of the lending be expected to be generated in the event
of sale, unattached by temporary, e.g. economically induced, fluctuations in value on the relevant
property market and excluding speculative elements.
2) To determine the mortgage lending value, the future marketability of the property is to be taken as a
basis within the scope of a prudent valuation, by taking into account long-term sustainable aspects of
the property, the normal and local market conditions, the current use and alternative appropriate uses
of the property.
Summarised, the MLV should reflect the long-term, sustainable aspects of a property in which all
speculative aspects are disregarded. This results in a value that is more or less equal to the long-term
lower limit of the property’s value during the loan. This is broadly in line with the definition on the MLV as
laid down in EU Directive 98/32/EC.
It is evident that the MLV is aimed to be a very conservative value and therefore, the MLV is not compliant
with the principles of the MV. This fact is also emphasised by the VDP as they stress the following:
“the MLV, unlike the MV, shows as little in the way of fluctuation as possible. The MLV must not exceed,
and indeed is usually lower than, the MV.” (VDP, The Pfandbrief 2013 - 2014 Facts and Figures, p. 12).
The figure below illustrates the ideal relationship between the MLV and MV:
Figure 4: Mortgage Lending Value vs. Market Value
Source: VDP, 2013, The Pfandbrief 2013 - 2014 Facts and Figures, p. 12/ own editing.
The Pfandbrief Act commends that the maximum loan is limited to 60% of the MLV (2014, p. 12).
Interim conclusion
Recapitulated, the MLV concepts attempts to take the long-term nature of the property loan in to
consideration by focusing on sustainability so that the determined MLV applies throughout the life of the
loan. Therefore the MLV is an independent value that is not comparable to the MV. Furthermore the MLV
must not exceed the MV. Consequently the MLV can be regarded as a “value at risk” based on lending
perspectives whereas the validity of a MV is limited to a short term and variable.
16
2.6 The determination of the MLV

The Mortgage Lending Value Regulation covering the determination of MLV is found in subparagraph one
and two of paragraph 16 of the Pfandbrief Act (2014, p. 13).
These subparagraphs stress that (1) the valuation serving as the basis for the establishment of the MLV
shall be conducted by a valuer who is not involved in the loan decision and who must have the requisite
professional experience and knowledge in order to make MLV assessments and (2) the MLV must not
exceed the value resulting from a prudent assessment of the future marketability of a property by taking
into account the long-term sustainable aspects of the property, the normal regional market condition as
well as the current and possible alternative uses.
In addition speculative elements must not be taken into consideration, the MLV must not exceed a MV
calculated in a transparent manner and in accordance with a recognized valuation method. This is
different to the RICS and IVSC definition of MV, defined as:
“The estimated amount for which an asset or liability should exchange on the valuation date between a
willing buyer and a willing seller in an arm’s length transaction after proper marketing and where the
parties had each acted knowledgeably, prudently and without compulsion.” (RICS, 2014, p. 16).
Two-pillar principle
According to § 4 of the Mortgage Lending Value Regulation (2014, p. 49) (1), the income value and (2)
the depreciated replacement cost value of the property serving as cover are to be determined separately; a
two-pillar principle. These values in relation to each other fulfil a mutual control function (Crimann W,
Rüchardt K., 2009, p. 90). Nonetheless, of decisive importance to the determination of the MLV is the
income value. The income value should preferably not exceed the depreciated replacement cost value by
more than 20%. In such a case comprehensible explanations must be given for the difference.
These valuation methods are described in section 1 and section 2 of The Mortgage Lending Value
Regulation. A brief abstract on these sections is presented below.
Section 1 Income Approach (§8 up to §13)
Income value
The income value is to be determined via the investment method in which the land value and income
value of the building(s) together make up the income value of the property serving as collateral. When
determining the income value of the building(s), only the net annual income that may be achieved on a
sustained basis is to be taken in consideration (the definition of sustainable income will be described later).
The net income is calculated by deducting the operating expenses from the gross income.
In order to determine the income value of the building(s) the net income must be reduced by the amount
that results from the appropriate interest rate (the details on an appropriate interest rate will be described
later) in respect of the land value.
Sustainable income
When determining the gross income only the income may be taken into consideration that the property is
capable of yielding to any owner on a sustained basis assuming proper management and permissible use.
Where the sustainable rent is in excess of the contractually agreed rent, the contractually agreed rent is as
a rule to be stated. Allocable shares in costs to be paid by the tenant or leaseholder to cover running costs
are not be taken into consideration. Where there are structural or prolonged vacancies, an examination
must be made in particular to establish whether on the basis of the current market situation a letting may
in the foreseeable future be expected at all or at the stated rents.
17
Operating expenses
The gross (sustainable) income must be reduced by the operating expenses normally to be covered by the
landlord. Income-reducing individual cost items, arrived at from many years of market experience, in
respect of management costs, maintenance costs and loss of rental income (risk) and any other running
costs not covered by allocable shares in costs are to be stated and a modernization risk, specific to the
property type in question, is to be taken into consideration. These individual cost items must be within the
specified bands in the Mortgage Lending Value Regulation unless the special circumstances of the case in
question necessitate that a higher amount is stated. A recognizable, acute loss of rental income risk that is
in excess of the stated empirical value must be stated as a separate value deduction in the amount of the
expected loss. The minimum operating expenses must total at least 15 % of the gross income although,
however, the actual or calculated operating expenses (over 15%) of a property must not be undercut.
Capitalization of net income

The net income of the building(s) (the total net income less the interest rate amount in respect of the land
value) is to be capitalized with a specified capitalisation rate (multiplier) taken up in the Mortgage Lending
Value Regulation that is the resultant from a discount factor within the specified bands stated in the
Mortgage Lending Value regulation, being capped at 5% for residential properties and at 6% for
commercial properties and taking in consideration the remaining economical useful life of the building(s).
The lower limit of this band may be undercut by a maximum of 0.5% in the case of prime commercially
used properties that fulfil the following stringent requirements (§12-4):
1) a very good location in the urban agglomeration;
2) a preferred site in keeping with the respective type of property,
3) a good infrastructure,
4) a good design
5) a high-quality fixtures and fittings,
6) a high-quality type of construction,
7) an especially high marketability,
8) restriction to the uses retail, wholesale, office and business,
9) a very good state of the property and
10) the given possibility to put the property to other uses.
In case of undercutting the prescribed bands for capitalisation rates, the report must provide a well-
defined, explanation.
The capitalization rate corresponds to the assumed interest rate (yields) at which the sustained net income,
achievable in the future, of a property is discounted over the period of its assumed payment on the basis
of a prudent assessment and based on experience. It must be derived from the relevant regional long-term
market developments.
Remaining useful economic life

The remaining useful economic life is to be estimated for on the basis of the question as to how long the
lettability of the property appears to be assured with the assumed income, taking into consideration the
user requirements that will change at increasingly shorter intervals. The Mortgage Lending Value
Regulation provides empirical values for the useful life to be adopted for building(s).
18
Section 2 Cost Approach (§14 up to §18)

Depreciated replacement cost value
The depreciated replacement cost value is to be determined using the cost approach. The depreciated
replacement cost value of the property serving as collateral is made up of the land value and the value of
the building(s) (including outdoor installations).
Land value
In assessing the land value the rules and regulations applicable to the land, characteristics of the land and
existing reference values or comparable prices are to be taken in account.
Value of the building(s)

In assessing the value of the building(s), the construction costs per square meter gross floor area (GFA) of
a comparable building(s) is to be multiplied by the GFA or other unit (i.e. square or cubic meters) of the
building(s) to be valued to come to the construction value.
The resulting construction costs are then multiplied by a reduction factor to reflect the property’s age. The
reduction in value due to age is determined according to (1) the ratio of the remaining useful life (as
described above) and to (2) the useful life of the building. Empirical values are provided by the Mortgage
Lending Value Regulation in Annex 2). This ratio it is to be expressed as a percentage of the construction
value.
Additional costs for outdoor installations and or landscaping may be added, if applicable to the assesses
remaining construction costs, these costs, may not exceed 5% of the assessed remaining construction
value. Next, incidental building costs, in particular costs for planning, execution of construction,
examinations and permits by authorities are determined, these costs may only be considered in the usual
amount/ in line with market conditions. These costs may not however exceed 20% of the assessed
remaining construction value including the cost of outdoor installations and landscaping. Finally, the
resulting construction value is to be reduced by a safety margin of at least 10% so that reductions in
construction prices and the validity of the costs of comparable building(s) are taken in to consideration.
Cross-border lending
Section 5 of the regulation on the determination of the MLV considers properties located outside Germany.
Paragraph 3 of this section adds to the above presented, that when determining the applicable
capitalisation rate peaks in values (long term and short term) achieved in the respective market should be
treated cautiously and risk averse.
19
The table below presents a brief recap of the principles on the determination of the MLV. To put this in to
perspective some principles on the determination of the MV’s are relatedly presented.
Table 5: Principles on the determination of the MLV

MORTGAGE LENDING VALUE MARKET VALUE
Methodology Two-pillar principle: Depends on situation:
Comparative Method, to value land and units where there are
comparable properties;
Depreciated Reconstruction Cost Method, to value only very
specialised buildings where there is no observable market;
Income & Cost Approach, commercial properties. Income Method (investment method), capitalisation of the net
income of the property;
Discounted Cash Flow approach, net present value of future cash
flows;
Residual method, to value undeveloped land.
Rental income Sustainable net rental income* Actual rental income

Rental value Sustainable net rental income Derived from actual lettings of comparable properties
Capitalisation rate Minimum capitalisation rate** Derived from actual sales of comparable properties and or
Built up IRR method
Operating expenses Minimum rate of 15% and prescribed bandwidths Based on experience and in accordance with market conditions
Additional risks Loss of rental income risk Not applicable, is covered in Cap-rate, rental value and costs
Modernisation risk
Source: VDP, 2014, The Pfandbrief Act/ own editing.
* The income stream of the property is limited to its sustainable net rental income, excluding any over-
renting and additional extraordinary cash flows.
** The capitalisation rate must reflect the long-term market developments, the sustainable income
producing capacity of the property, alternative uses as well as its future marketability.
Interim conclusion
The MLV must be determined in accordance with the detailed statutory provisions stated in the German
Pfandbrief Act and the incorporated section that covers the regulation for the determination of the MLV. In
the determination of the MLV all common valuation approaches apply; income approach, comparative
and cost approach. Within these approaches sustainable considerations impact on: the calculation of
rental income, the handling of operating costs and the calculation of the capitalisation rate.
The MLV determination of commercial properties is based on the two-pillar principle (cost value and
income value). The focus in the determination of the income lies on sustainable values; sustainable income
(no-over rented capitalisation) that is to be capitalised by specified multipliers corresponding to sustainable
long-term yields. In addition speculative elements must not be taken into consideration and the MLV must
not exceed the MV. As the future is unknown the provisions include numerous standardised yardsticks such
as; safety margins, minimum rates, upper limits, lower limits and or bandwidths.
The statutory provisions stress that income should be equivalent to only the gross income that the property
is capable of yielding to any owner on a sustained basis assuming proper management and permissible
use. The interest rate (yield) at which the sustained net income is discounted should be based on a prudent
assessment and experience and derived from the relevant regional long-term market developments. For
20
properties abroad, a specific focus is on peaks in values achieved in the respective market on a long term
basis.
These provisions provide guidance but do not provide a completely comprehensive explanation of how
exactly to determine these essential variables. Crimann and Rüchardt (2009) studied the special
methodological features involved in determining the MLV’s under the Pfandbrief Act. First of all they
highlight that sustainable values do not mean that these values need to be excessively cautious or “anxiety”
values. Furthermore they reason that the valuer should not only draw insights from current prices but also
on past appraisal experience (an actual time span is not defined) and from looking at the future by
making critical use of analysis and forecasts.
Given this, it is clear that the outcome of the MLV remains highly depended on historical fundamentals, to
be more specific on rents and yields.
In chapter four the MLV’s of a selection of properties (suitable for Pfandbrief financing) will be determined.
These MLV’s are determined per the transaction date (pre-crisis), in accordance with the previous
described statutory provisions that are stated in the German Pfandbrief Act, to be more specific in the
BelWertV and are based on the market conditions applicable at that time. The exercise will demonstrate
whether the MLV is suitable as a sustainable value in The Netherlands bearing in mind that according the
theory the MLV must not exceed, and indeed is usually lower than, the MV.
2.7 Security provided to investors by MLV

According to the German Federal Government “ The special statutory provisions in Germany mean that
Pfandbriefe are already safe - throughout more than the 200-year long history of the product the has
never been a default on a German Pfandbrief” (VDP, 2004, P2).
The VDP itself highlights the first-class credit quality as they stress that the degree of safety provided by the
Pfandbriefe is only comparable to the degree of safety offered by a number of sovereign issuers (available
at http://www.pfandbrief.de).
According to the VDP, the high degree of safety / first-class credit quality is to be explained by the
following:
 The legal framework and the special supervision to which the Pfandbrief banks are subjected, as
under, the general provisions of the German Banking Act (KWG), which governs the operations of
all German credit institutions and Pfandbrief banks are subject and also to the provisions of the
German Pfandbrief Act;
 Since 2005 when the Pfandbrief Act entered into force, any institution may now issue Pfandbriefe
provided it has core capital of at least EUR 25 million and fulfils the requirements of the Pfandbrief
Act with regard to the management, monitoring and control of risks.
 In order to engage in Pfandbrief business a license is needed from the Federal Financial
Supervisory Authority (BaFin);
 Cover principle, Pfandbrief Banks are required to keep a statutory overcollateralization of at least
2% of the volume of Pfandbriefe outstanding in their cover pools on a net present value basis. The
overcollateralization is intended to cover administrative expenses and to meet liquidity
management costs in the event of the bank’s insolvency. Moreover, Pfandbriefe are covered at all
times by loans equal at least to the nominal value of all issues outstanding.
 Separate cover pools. Mortgage loans, public sector loans, ship mortgages and aircraft
mortgages, which are funded through Pfandbrief, are allocated in separate cover pools. The
cover assets held in the pools serve first to satisfy the Pfandbrief creditors, and in the event of a
Pfandbrief bank’s insolvency do not participate in the insolvency proceedings. Pfandbrief investors’
claims are to be satisfied out of the cover pool taking into account the issue terms. In the event
that interest payment and principal redemption claims cannot be satisfied because a cover pool is
insolvent, special insolvency proceedings are instituted in respect of the cover pool in question.
21
 Cover pool monitor and audit. The Federal Financial Supervisory Authority (BaFin) appoints one or
more independent cover pool monitors for each Pfandbrief bank. It is the cover pool monitor’s job
to ensure that the mandatory cover for the Pfandbriefe exists. In addition to general banking
supervision, Pfandbrief banks are subject to special supervision by the Federal Financial
Supervisory Authority (BaFin), the aim of which is to monitor compliance with the Pfandbrief Act
and the regulations issued in connection with it. Under the supervision cover audits of the assets
that the statutory requirements are observed must be conducted at least every two years.
 Limitation of loan to value and prudently calculated MLV. As set out in paragraph 2.5 and 2.6,
the Pfandbrief Act provides in the Mortgage Lending Value Regulation that commends that the
maximum loan is limited to 60% of the MLV. This combination is presented by the VDP as a safety
cushion that offers Pfandbrief holders comfortable protection against depreciation caused by
cyclical fluctuations of the MV of the assets in the cover pool.
 Addressing other risks. Besides the credit risk, the interest rate and exchange rate risk (in case of
cross-border financing) as well as the liquidity risk are to be addressed in assessing the net present
value of the cover pool. Pfandbrief banks must conduct weekly stress tests that involve the
simulation of drastic interest rate and exchange rate changes. Moreover, the liquidity need of the
next 180 days must be covered at all times.
 The credit quality of the Pfandbrief is acknowledged throughout the EU. An example can be found
in article 52 IV of EU Directive 2009/65/EC on the coordination of laws, regulations and
administrative provisions relating to undertakings for collective investment in transferable securities
(UCITS).
Interim conclusion
The Pfandbrief Act incorporates numerous provisions in order to provide safety to investors. This safety is
primarily assured by; (1) the preferential right for creditors in the event of insolvency, (2) stringent criteria
for cover assets such as the fact that loans are required to be secured by real estate liens and financing
outside Germany is permissible only in the EU and a selection of other countries, (3) the MLV is the basis
for lending and a maximum of 60 % may serve as cover, (4) a guaranteed cover pool quality due to
prescribed monitors including stress tests, cover audits and the legally prescribed over overcollateralization
and (5) Pfandbrief business is subject to approval by the Federal Financial Supervisory Authority (BaFin)
and credit institutions wishing to engage in Pfandbrief business must file for a license to issue Pfandbriefe
with BaFin. Credit quality of the Pfandbrief is acknowledged throughout the EU and due to these safety
measures almost all Pfandbriefe have been awarded a triple-A rating by a rating agency. According to the
VDP the concept of MLV and the fact that property financings may be included in cover only up to the
mortgage lending limit of 60 % of the MLV is one of the central pillars of the safety provided (2014, P. 12).
Quentin, J, also argues this as he states, “the safety of the mortgage Pfandbrief is the most essential role
of the MLV” (2009, p.318).
22
3 REAL ESTATE MARKET CHARACTERISTICS THE NETHERLANDS VS GERMANY
3.1 Introduction
This chapter will discuss the Dutch real estate market and the German real estate market in order to
determine whether there is a similarity between the capital value growth over the last years. To place
these markets in a good context this chapter will start off with the fundamentals of real estate markets and
characteristics to which the real estate markets are subjected.
3.2 Real Estate Characteristics

Gool van, et al (2007, p 19) defines real estate investments as the following: locking up assets (money) in
real estate, in order to generate future returns by the operation and or disposition of real estate. These
investments in real estate can be done direct (invest in bricks) or indirect through a Real Estate Investment
Trust (REIT) (invest in stocks), these REIT’s can be publicly or privately held. Indirect real estate investments
are not relevant to the topic of this research and are therefore not taken in to consideration.
Direct and Indirect Return

Just like other asset classes real estate has its own specific characteristics. Direct real estate investments
produce returns that are a mixture of direct return (net income stream of the property) and indirect return
(value growth). This income stream and value growth is not guaranteed and can be volatile as it depends
on market conditions on the rental and investment market. The direct income is usually fairly stable due to
the lifespan of real estate and the often relatively long remaining lease lengths. Of major importance to
the direct income are the solvency of tenants and the quality and location of the property. The indirect
income is derived from the increase in the value of a property between acquisition and disposition. For this
reason the majority of the volatility in returns is the result of value growth.
Risk and return

Investment decisions are based on expectations, assumptions and predictions of the future and achieved
returns in the past do not provide a guarantee for the future as there is an uncertainty about the future
returns and this implies risk. Based on a series of returns (period 1985 – 2005) van Gool concludes that
direct real estate shows attractive returns given relatively limited risk, in other words the risk and return
trade-off is particularly good (2007, p 23, 44). However since 2007 global real estate markets have seen
a fundamental change and witnesses a severe turning point since the peak in 2007.
Property cycle
The current economical downturn and the fundamental change of the real estate market are, historically
seen, nothing new. There have been many previous examples of booms and busts for example the 1970s,
1980s and 1990s. The property market is influenced by the underlying economy and similarly
characterized by a pronounced cyclical character. Many authors compare this cyclical character with the
“hog cycle” a cycle in which periods of scarcity and oversupply alternate.
Dehesh A and Pugh C (1996) stress that it has long been recognised that the property sector is subject to
the cycles of boom and bust, and that there are observable variations in the cycles’ amplitude (inflationary
height and recessionary depth). The cycles property markets move in, have a classical pattern, namely: a
slow upward start, then a period of manic buying followed by a slowdown and standstill, then the market
changes direction and prices begin to head downwards, at first slowly and then with a collapse to a new
market bottom from which the next up-cycle can begin. The figure below reproduces this pattern. The
property cycle is characterised by economic and financial interdependence between the macro economy
as a whole and the property sector.
23
The interdependence runs in a cause and effect relationship from both the macro economy to the property
sector to the macro economy.
Figure 5: The property cycle
Source: REEFF/ own editing
Key T., et al. (1994) stress in a RICS study that the property cycle follows the business cycle, a cycle that
consists of four stages: expansion, prosperity, contraction, and recession. The following description is
according to Key. T et al the definition of the property cycle:
“Property cycles are recurrent but irregular fluctuations in the rate of all property total return, which are
also apparent in many other indicators of the property activity, but with varying leads and lags against the
all property cycle”(1994, p. 9).
Furthermore, Key T., et al ibid emphasize that property cycles are driven by economic cycles; however with
their own dynamics and mechanisms and are therefore not just a reflection of a business cycle as property
cycles experiences a demand and supply lag. This lag is a result of the time that is needed to buy land,
designing, funding and building a property. Between the start and completion of buildings there is a lag of
two or three years and therefore the property cycle will not follow the business cycle directly.
Eichholtz also implies that real estate markets and cycles are inextricably linked and that again extended
periods with extremely high vacancy rates are followed by periods of abnormally low vacancy rates (1996,
p 253).
The above mentioned theories of the property cycle are shared by the RICS as they describe the property
cycle as a logical sequence of recurrent events reflected in factors such as fluctuating prices, vacancies,
rentals and demand in the property market. Also, the RICS stresses that the property cycle is influenced by
business and economic cycles that typically last over a decade. Besides this the RICS points out that there
are two different property cycles, the first being the physical cycle of demand and supply which determines
vacancy and that in turn, drives rents and the second being the financial cycle where capital flows affects
prices.
24
Interim conclusion
Property markets are unmistakable influenced by business and economic cycles, but are also characterised
by their own cyclical character. This cycle is also observable in The Netherlands and at the time of writing
(2014) we at the bottom of the cycle following the Great Financial Crisis, and are at a stage where some
values are starting to rise.
3.3 Dutch & German Real Estate Market

According to Bloomberg the Dutch economy has gone through three recessions since the global financial
crisis started in 2008 (2014, available at http://www.bloomberg.com). The global recession also took its
toll on the real estate market in The Netherlands. Since the start the Dutch real estate market has been
pressure and characterized by deteriorating real estate fundamentals and limited real estate funding. As a
result the overall real estate sector witnessed a severe decline in property values, in particular non-prime
assets.
Figures published by the Investment Property Databank (further IPD) on the value growth on a quarterly
basis confirm this severe downward trend. In addition to the value growth numbers according to the IPD
the numbers on the value growth as calculated by CBRE are taken up in the analysis. This is done for
several reasons. The first reason is to confirm the downward trend. The second reason is to point out that
the negative value growth for the specific asset class of offices is stronger according to CBRE than IPD
calculations whilst the other asset classes or more or less in line with each other. The third reason is that in
the following paragraph, the value growth of Dutch real estate will be compared to the value growth of
German real estate. The CBRE numbers are derived from the CBRE European Valuation Monitor that is
based on portfolios regularly valued by CBRE international and national valuation teams across Europe.
The graph below illustrate the fall in values of commercial properties in The Netherlands (including office,
retail and industrial properties).
Graph 2: Value growth Offices
105,00
100,00
95,00
90,00
85,00
80,00
75,00
70,00
65,00
60,00
55,00
50,00
45,00
Q4 2007
Q4 2008
Q4 2009
Q4 2010
Q4 2011
Q4 2012
Q4 2013
CBRE Offices NL IPD/ROZ Offices NL
Source: IPD & CBRE/ own editing

The graph above strongly demonstrates the fall in capital value in the office sector in The Netherlands
from the peak of the market in the end of 2007 with a small stabilisation during 2009. The value growth
of offices and industrial properties declined in 2013 for the sixth year in a row. In this segment the value of
poor investment grade (unmarketable) and vacant properties are severely under pressure.
25
Graph 3: Value growth Industrial

105,00
100,00
95,00
90,00
85,00
80,00
75,00
70,00
65,00
60,00
55,00
50,00
45,00
Q4 2007
Q4 2008
Q4 2009
Q4 2010
Q4 2011
Q4 2012
Q4 2013
CBRE Industrial NL IPD/ROZ Industrial NL
The graph above demonstrates that also in the industrial sector a strong fall in capital values in The
Netherlands, however to a lesser extent than offices, is perceptible in The Netherlands.
Graph 4: Value growth Retail
105,00
100,00
95,00
90,00
85,00
80,00
75,00
70,00
65,00
60,00
55,00
50,00
45,00
Q4 2007
Q4 2008
Q4 2009
Q4 2010
Q4 2011
Q4 2012
Q4 2013
CBRE Retail NL IPD/ROZ Retail NL
The graph above illustrates that too the values of retail properties have dropped since 2012 after 2 years
of increase. Overall the retail sector in The Netherlands underwent a relatively minor fall in capital values.
It appears that the fall in capital values in this sector is currently on going (after 2013). A possible reason
for this minor fall in capital value is that many investors regarded the retail sector until 2013 as a safe
haven for their investments.
As other international real estate markets the German real estate market is also influenced by the
underlying economy and similarly characterised by phases of pronounced upward and downward
movements. In addition the German real estate market is also dependent on real estate financing.
According to the VDP (2011) the German real estate market has shown itself, in relation to international
26
standards in particular, to be stable over the last years and decades. They argue that one of the main
reasons for this stability is the fact that German banks usually lend on a MLV (precondition for Pfandbrief
banks) instead of a MV. The VDP stresses that this possibility has proven increasingly important in the past
months and years as there were phases in which Mortgage Pfandbriefe was the only capital market
product with which property loans could be refinanced. The figure below presents the All Property Value
growth in Germany and The Netherlands. The above-mentioned more stable trend is strikingly evident in
the graph below.
Graph 5: CBRE All Property NL vs. All Property Germany

105,00
100,00
95,00
90,00
85,00
80,00
75,00
70,00
65,00
60,00
55,00
50,00
45,00
Q4 2007
Q4 2008
Q4 2009
Q4 2010
Q4 2011
Q4 2012
Q4 2013
CBRE NL All property CBRE GE All property
Source: CBRE/ own editing
The graph above clearly demonstrates that overall real estate market in The Netherlands faced a stronger
negative value growth. The next figures will show that the value growths per sector (Office, Industrial &
Retail) differ substantially and show different patterns.
Graph 6: Value growth Offices NL vs. Offices Germany

105,00
100,00
95,00
90,00
85,00
80,00
75,00
70,00
65,00
60,00
55,00
50,00
45,00
Q4 2007
Q4 2008
Q4 2009
Q4 2010
Q4 2011
Q4 2012
Q4 2013
CBRE Offices NL CBRE Offices GE
The graph above shows that the office sector in Germany underwent a fall in value of circa 15% whilst the
same sector in The Netherlands faced a fall in value of circa 50%.
27
Graph 7: Value growth Industrial NL vs. Industrial Germany

105,00
100,00
95,00
90,00
85,00
80,00
75,00
70,00
65,00
60,00
55,00
50,00
45,00
Q4 2007
Q4 2008
Q4 2009
Q4 2010
Q4 2011
Q4 2012
Q4 2013
CBRE Industrial NL CBRE Industrial GE
The graph above shows a similar downward trend in value growth for the industrial sector in Germany
and The Netherlands where the negative value growths amounted to circa 25% and 38%, respectively.
Graph 8: Value growth Retail NL vs. Retail Germany

105,00
100,00
95,00
90,00
85,00
80,00
75,00
70,00
65,00
60,00
55,00
50,00
45,00
Q4 2007
Q4 2008
Q4 2009
Q4 2010
Q4 2011
Q4 2012
Q4 2013
CBRE Retail NL CBRE Retail GE
The graph above shows a more or less similar pattern in value growth for the retail sector in Germany and
The Netherlands where the negative value growths amounted to circa 15% and 8%, respectively. This
means that the fall in value only in this sector is stronger in Germany.
Interim conclusion
The graphs demonstrate that The Dutch and the German real estate markets both, are (1) quite similarly
influenced by the state of the economy since 2006, (2) similarly characterised by phases of pronounced
upward and downward movements and (3) dependent on real estate funding. The impact of the economy
on the German real estate market however, appears to have a less significant impact. An explanation can
be found in the fact that the majority of German banks use the MLV, as a basis for financing and
28
refinancing real estate where Dutch banks use the MV as basis for lending, a value that is limited to an
effective valuation date reflecting present-day market conditions.
The before mentioned is also recognized by the VDP as the state the following: “Over the decades in which
it has been applied, the mortgage lending value has helped mortgage lending in Germany to have a
stabilizing effect on the German real estate market, in particular by evening out current, possibly
exaggerated market expectations.” (available at http://www.pfandbrief.de). This idea is also recognised by
Lea et al as she asserted in her book The risks of commercial real estate lending that “MLV has stabilised
property cycles in Germany” (as cited in Crosby et al, 2011, p. 13).
29
4 CASE STUDIES SELECTED OFFICE BUILDING FOCUSS ON MV AND MLV.
4.1 Introduction
This chapter will focus on the long-term validity and sustainability of the MLV in The Netherlands.
According to the theory the purpose of the MLV is to provide a long-term sustainable value during the term
of the loan that does not follow the market cycle.
To examine if this theory actually applies as such in the Netherland a selection has been made of office
properties (suitable for Pfandbrief financing) that have been acquired pre-crisis and during the crisis. This
is done to establish their MV’s at the respective transaction dates. Subsequent the MLV’s of these properties
are determined per the acquisition date (pre-crisis). These calculations are made based on detailed
statutory provisions of the German Pfandbrief Act and are based on the respective market conditions. After
the determination of the MLV’s the outcome can be compared to the actual transaction prices achieved on
sale during the crisis. This outcome, although on a limited selection of assets, will demonstrate whether the
MLV proves t’s suitability as a sustainable value in The Netherlands bearing in mind that the MLV must not
exceed, and indeed is usually lower than, the MV.
4.2 Selected properties.

In total a selection of 5 properties has been made. Given the fact that this study aims at properties that
have to be suitable for Pfandbrief financing and the prerequisite that they were transacted pre-crisis and
during the crisis (low investment volume and thin investment market), the available properties where
understandably limited.
The following properties where selected:
Table 6: Selected properties

BUILDING CITY ADDRESS NLA (sq m)
Atrium Amsterdam Strawinskylaan 3001-4111 33,094
The Rock Amsterdam Claude Debussylaan 80 29,600
Weesperpoort Amsterdam Wibautstraat 112-128 4,478
Amsterdam Weesperstraat 420-446 7,416
Weesperstate Amsterdam Weesperplein 6-8 12,744
A brief introduction of each property will be presented separately followed by a summary of the MLV
calculation and other essential information.
30
Amsterdam, Strawinskylaan 3001-4111 (Atrium)

The Atrium is a landmark office complex located in the most prestigious office location of The
Netherlands, Amsterdam South Axis. The Atrium dates from 1974 and has been extensively refurbished in
the years 2005-2006. The complex consists of three towers and comprises office space over a over a
ground floor and 11 upper floors. According to the NEN2580 measurement certificate the GFA is 39,644
sq. m. and the LFA 34,721 sq. m. In addition the Atrium benefits from 240 parking facilities in the garage
and 80 parking facilities arranged at ground level. The Atrium is built mainly on freehold land.
The Atrium is multi-let to over 25 tenants (per 2007) and provides high quality modern office
accommodation. The Atrium is almost fully let (in terms of sustainable rental income circa 3% vacancy).
31
Figure 6: Fact sheet

Amsterdam
Strawinskylaan
MLV SUMMARY SHEET
B U I L D I N G L O C A T I O N
K E Y I N F O R M A T I O N C A D A S T R A L I N F O R M A T I O N
Property name Amsterdam Municipality Amsterdam

Address Strawinskylaan Cadastral section (s) AB
City Amsterdam Number(s) various
Property type Office Apartment index various
Construction year 1974 Cadastral area (sq m) 12,933
GFA 39,644
NLA 32,744 Freehold / Leasehold Freehold, partly leasehold and condominium ownership
Number of parking facilities 240 Owner Victory Advisors
Ground lease bought off untill June 2008
First transaction date aug-07
First transaction price € 200,000,000 Notes
MLV € 125,300,000 The office construction is situated on parcels 2138 & 2090, these parcels are held freehold.
Second transaction date jun-13 Overground parking facilities are located on parcel 2136, this parcel is held on a lease of which the
ground rent has been bought off untill June 2088. This parking garage is located on parcel 2139 (2
Second transaction price € 100,000,000
appartment rights, A1 & A2) The owner of the subject property has a share of 59%.
MV in % of MLV 79.81%
M L V D E T E R M I N A N T S D R C M L V D E T E R M I N A N T S I C
Land value per sq m site € 4,200 Annual contractual rent € 9,511,609

Land v alue € 53,745,000 Annual sustainable rental value € 9,463,580
Annual gross income for MLV € 9,463,580
Building costs per sq m € 1,350
Building costs per parking facility € 14,000 Management costs € 386,543
Total building costs € 56,879,400 Maintenance costs € 317,949
Loss of rental income risk/running void € 378,543
Empirical Value for estimated useful life 60 Revitalisation/modernisation risk € 170,638
Remaining useful life 50 Non recoverable running costs/service charges € 310,405
Depreciation 17% Subtotal operating expenses € 1,564,078
Depreciated building costs € 47,209,902 Subtotal operating expenses in % 16.53%
Operating expenses minimum 15% € 1,419,537
Outdoor installations/landscaping/utilities € 2,360,495 Operating expenses for MLV € 1,564,078
Subtotal building value € 49,570,397 Annual net income for MLV € 7,899,502
Incidental building costs € 9,914,079
Building value before safety margin € 59,484,476 Capitalization rate commercial 6.00%
Safety margin € 5,948,448 Land value € 53,745,000
Building value after safety margin € 53,536,028 Net Income to the land € 3,224,700
Other value additions or deductions (§ 18 BelWertV) € 6,326,126 Net Income to the building € 4,674,802
Value of the Building € 53,536,028 Remaining useful life € 27
Multiplier 15.76
Land value € 53,745,000 Income v alue of the building € 73,674,880
Value of the building(s) € 53,536,028 Land value € 53,745,000
Refurbishment € -1,800,000 Refurbishment € 0 per sq m LFA € -1,800,000
Depreciated replacement Cost Value € 105,450,000 Income Value € 125,300,000
O P I N I O N O F V A L U E
Depreciated replacement cost value/cost approach € 105,450,000

Income value € 125,300,000
Value additions or deductions € -

Mortgage Lending Value ( MLV) in accordance with § 16 P fandBG € 125,300,000
MLV per m² floor area including parking rights € 3,827
32
Comments
Land values for offices are based on the ground policy of the Municipality of Amsterdam per 2007 and
range from € 1,089 to € 1,792 per sq. m. GFA (built). A reference for the adopted land value is the land
allocation of for the development of office project “The Rock” (land allocation price of € 1,500 per sq. m
GFA).
Building costs are based on the mostly recently available published building cost indexes for office
buildings in The Netherlands and where regressed to 2007.
The construction year of the subject property is 1974. As the property has been refurbished in 2005 and
further improvements (CapEx adopted in MLV calculation) are planned in the near future a RUL of 50
years was adopted.
As the tenancy schedule mentioned a lower LFA the LFA as mentioned in the tenancy schedule was
adopted.
The Atrium benefits from parking facilities that are arranged over the ground level , in a jointly owned
parking garage (59%) and also located in an adjacent garage that is owned by the State and are used
under an occupational lease. The last mentioned parking facilities have been excluded in the MLV
calculation as the use under this specific occupation lease is regarded as not sustainable. The parking
facilities adopted in the MLV calculation concern the parking facilities outside (80) and 240 (59% of 411
spaces rounded down) of the parking facilities located in the parking garage on parcel AB 2139.
According to CBRE research, the NIY for prime office properties ranged from 5.30% in December 2006 to
4.9% in December 2007 as evidenced by a number of transactions. The adopted capitalisation rate is
6.0%; this is in accordance with the Bands for capitalisation rates (Annex 3 BelWertV, lower limit for office
buildings is 6.0%).
33
Amsterdam, Claude Debussylaan 80 (The Rock)

The Rock is the development of a landmark office building located in the most prestigious office location of
The Netherlands, Amsterdam South Axis. At the time of the first transaction the development was
scheduled to be completed in October 2008. The development comprises a 3 level basement, ground-,
mezzanine- and 22 upper floors. According to the NEN2580 measurement certificate the GFA is 35,830
sq. m. and the LFA 29,889 sq. m. The Rock does not have own parking facilities. The owner however has
the right to use 1:125 parking spaces per m2 office space and 1:100 per m2 commercial area in the
underground parking facility (Q-park). The Rock is built on land that has been granted under on a
perpetual lease (owner Municipality of Amsterdam) for 50 years commencing the 1st of May 2006.
The Rock is for approximately 72% pre-let to the law and notary firm De Brauw Blackstone Westbroek for
10 years, commencing 1st of October 2008. The seller provided a rental guarantee of 2 years,
commencing 1st of October 2008.
34

Amsterdam
Claude Debussylaan
MLV SUMMARY SHEET

Address Claude Debussylaan Cadastral section (s) AK
City Amsterdam Number(s) 3643 & 2851
Property type Office Apartment index n.a.
GFA 35,830
NLA 29,600 Freehold / Leasehold Leasehold
Number of parking facilities 0 Owner WestInvest InterSelect
Ground lease bought off untill May 2056
First transaction date aug-07
MLV € 130,300,000
Second transaction date mrt-12

Building costs per parking facility € - Management costs € 175,750
total building costs € 62,702,500 Maintenance costs € 316,800
Depreciation 0% Subtotal operating expenses € 1,295,783
Depriciated building costs € 62,702,500 Subtotal operating expenses in % 14.75%
Operating expenses minimum 15% € 1,318,125
Outdoor installations/landscaping/utilities € 1,567,563 Operating expenses for MLV € 1,318,125
Building value after safety margin € 69,411,668 Net Income to the land € 3,009,720
Other value additions or deductions (§ 18 BelWertV) € - Net Income to the building € 4,459,655
Multiplier 17.18
Refurbishment € - Refurbishment € 0 per sq m LFA € -

35
Comments
Land values for offices are based on the ground policy of the Municipality of Amsterdam per 2007 and
range from € 1,089 to € 1,792 per sq. m. GFA (built). A reference for the adopted land value is the land
allocation of for the development of the subject office project (land allocation price of € 1,500 per sq. m
GFA).
The subject property is yet to be completed; therefore a RUL of 60 years was adopted. This RUL is
estimated in accordance with the Empirical values for the useful life of building(s) (Annex 2 BelWertV).
The NEN2580-measurement certificate mentions a LFA of 29,898 sq. m. This LFA includes general
building facilities. In the calculation of the sustainable rent the following areas where adopted; office
28,500 sq. m., ancillary space (archive) 300 sq. m. and commercial space 800 sq. m.
4.9% in December 2007 as evidenced by a number of transactions). The adopted capitalisation rate is
5.50%, a 0.5% undercut of minimum capitalisation rate as prescribed in the Bands for capitalisation rates
(Annex 3, lower limit for office buildings is 6.0%). The subject property is considered to be a prime
property as it fulfils the requirements as laid down in BelWertV (§12-4).
36
Amsterdam, Wibautstraat 112-128 (Weesperpoort)

The Weesperpoort property is a robust (but slightly dated and basic fit out) office building located along
the Wibautstraat near the city centre of Amsterdam (strategically between Amsterdam Centre and the
motorway ring). The property’s area (Weesperstraat – Wibautstraat) represents a strong cluster of
municipal public authorities and non-profit organizations. The property dates from 1983 and comprises a
basement, ground- and five upper floors. According to the NEN2580 measurement certificate the GFA is
6,792 sq. m. and the LFA 4,478 sq. m. In addition the property provides 41 spaces in an underground
parking facilities. The property is built on freehold land.
The property is multi-let to 8 tenants (per 2006) and provides simple and basic quality office
accommodation. The property is fully let.
37
Figure 8 Fact sheet

Amsterdam
Wibautstraat 112-128
MLV SUMMARY SHEET

Address Wibautstraat 112-128 Cadastral section (s) W
City Amsterdam Number(s) 3760
GFA 6,792
NLA 4,478 Freehold / Leasehold Freehold
Number of parking facilities 41 Owner Nabesa
Ground lease bought off untill n.a.
First transaction date nov-06
MLV € 7,900,000
Second transaction date dec-13
Land value per sq m site € 2,700 Annual contractual rent € 650,000

Land v alue € 6,720,000 Annual sustainable rental value € 650,000
Annual gross income for MLV € 650,000
Depreciation 40% Subtotal operating expenses € 124,155
Operating expenses minimum 15% € 97,500
Outdoor installations/landscaping/utilities € 136,575 Operating expenses for MLV € 124,155
subtotal building value € 5,599,575 Annual net income for MLV € 525,845
Safety margin € 671,949 Land value € 6,720,000
Building value after safety margin € 6,047,541 Net Income to the land € 436,800
Other value additions or deductions (§ 18 BelWertV) € 584,541 Net Income to the building € 89,045
Multiplier 13.79

38
Comments
Land values are based on the ground policy for offices of the Municipality of Amsterdam per 2007 and
range from € 456 to € 1,320 per sq. m. GFA (built).
4.9% in December 2007 as evidenced by a number of transactions. Due to the basic fit out and age the
adopted capitalisation rate is 6.5%; this is in accordance with the Bands for capitalisation rates (Annex 3
BelWertV, lower limit for office buildings is 6.0%).
39
Amsterdam, Weesperstraat 420-446

Weesperstraat 420-446 is an office building located along the Weesperstraat near the city centre of
Amsterdam (strategically between Amsterdam Centre and the motorway ring). The property s’ area
(Weesperstraat – Wibautstraat) represents a strong cluster of municipal public authorities and non-profit
organizations. The property dates from 1994 and has been refurbished by tenant in 2006. The property
comprises a basement, ground- and eight upper floors. According to the NEN2580 measurement
certificate the GFA is 9,057 sq. m. and the LFA 7,416 sq. m. In addition the property provides in 101
underground parking facilities in a private parking garage in the basement. The property is built on land
that has been granted under on a perpetual lease (owner Municipality of Amsterdam) of which the ground
rent has been paid off until 31 March 2041.
The property is (per 2007) fully leased to the Municipality of Amsterdam until 1 June 2021.
40

Amsterdam
Weesperstraat 420-446
MLV SUMMARY SHEET

Address Weesperstraat 420-446 Cadastral section (s) O
City Amsterdam Number(s) 4384
GFA 9,057
NLA 7,416 Freehold / Leasehold Leasehold
Number of parking facilities 101 Owner Lasalle Investments
Ground lease bought off untill April 2041
First transaction date 06 2006
MLV € 21,300,000
Second transaction date dec-13

Other value additions or deductions (§ 18 BelWertV) € 1,263,601 Net Income to the building € 780,260
Multiplier 15.76

41
Comments
The construction year of the subject property is 1994. As the property has been refurbished in 2006 a RUL
of 55 years was adopted.
buildings is 6.0%). In order to reflect the relatively short leasehold situation an additional premium of
0.10% is adopted on the lower limit.
42
Amsterdam, Weesperplein 6-8 (Weesperstate)

The Weesperstate property is a high quality office building located along the Weesperplein (crossing
Weesperstraat and Sarphatistraat) near the city centre of Amsterdam (strategically between Amsterdam
Centre and the motorway ring). The property s’ area (Weesperstraat – Wibautstraat) represents a strong
cluster of municipal public authorities and non-profit organizations. The property dates from 1970 and
was heavily renovated just prior 2007. The property comprises a basement, ground- and eight upper
floors. According to the NEN2580 measurement certificate the office GFA is 12,924 sq. m. and the LFA
12,664 sq. m. Besides office space the property includes a small retail unit with an estimated GFA of 84
sq. m and LFA 80 sq. m. In addition the property provides 40 spaces in a private parking garage in the
basement. The majority of the property (office) is built on freehold land. The retail unit is built on land that
has been granted under on a perpetual lease (owner Municipality of Amsterdam annual ground rent c.a.
€2,250).
The office space is (per 2007) fully leased to the Municipality of Amsterdam until 31 December 2024 and
the retail unit is leased to a local retailer until 31 July 2020.
43

Amsterdam
Weesperplein 6-8
MLV SUMMARY SHEET

Address Weesperplein 6-8 Cadastral section (s) O
City Amsterdam Number(s) 4244, 4137 & 4624
Property type Office Apartment index A1 & A2 (nr. 4244)
GFA 13,008
NLA 12,744 Freehold / Leasehold Freehold (partly leasehold)
Number of parking facilities 40 Owner Achmea Dutch Office Fund.
Ground lease bought off untill n.a.
First transaction date okt-07
MLV € 33,000,000 O 4244 A1comprises a part of 8761/ 8972 in the plot of land (office building and parking).
Second transaction date dec-14 O 4244 A2 comprises a part of 211/ 8972 in the plot of land (basement space under subject property
in use by municipality). Parcel O 4624 is held leasehold (owner Municipality of Amsterdam). Ground
rent c.a. € 2,250 p.a.

Other value additions or deductions (§ 18 BelWertV) € 2,319,045 Net Income to the building € 1,266,176
Multiplier 15.99

44
Comments
buildings is 6.0%). As 80 sq. m. of the total 12,744 sq. m. is held leasehold, no additional premium is
adopted on the lower limit. The annual ground rent is covered in the adopted non-recoverables.
45
Interim conclusion
The essence of this chapter is to verify whether the determined MLV’s of the selected properties per the
transaction date (pre-crisis) can be regarded as a sustainable. In other words verify whether the MLV’s do
not exceed the last transaction price. The determined MLV’s show a mixed picture. In three cases the MLV’s
exceeded the last transaction price. This is the case for the properties one (Atrium), three (Weesperpoort)
and four (Weesperstraat 420-446). The MLV of property two (The Rock) is more or less in line with the last
transaction price (MLV €130,300,000 vs. MV 131,870,000). The MLV of property five did not exceed the
last transaction price. It is noteworthy that the transaction of this property was concluded very recent
(December 2014), when a significant turnaround in market segment took place.
Table 7: Outcome case study

CHANGE
% MLV DATE OF TRANSACTION IN VALUE MLV %
BUILDING CITY ADDRESS MLV OF MV SALE PRICE (MV) OF MV
Atrium Amsterdam Strawinskylaan 3001-4111 € 125,300,000 62.65% Jun-13 € 100,000,000 -50.00% 125.30%
The Rock Amsterdam Claude Debussylaan 80 € 130,300,000 78.97% Mar-12 € 131,870,000 -20.08% 98.81%
Weesperpoort Amsterdam Wibautstraat 112-128 € 7,900,000 91.51% Dec-13 € 5,000,000 -42.08% 158.00%
Amsterdam Weesperstraat 420-446 € 22,100,000 73.67% Dec-13 € 20,665,000 -31.12% 103.07%
Weesperstate Amsterdam Weesperplein 6-8 € 33,000,000 66.94% Dec-14 € 44,058,000 -17.47% 74.90%
46
5 CONCLUSION / IS THE MLV A TRUE SUSTAINABLE VALUE

Since the outbreak of the crisis in 2008 the real estate market in The Netherlands witnessed a severe
downturn resulting in serious declines of MV’s. This downturn is worsened by the virtual standstill in
financing as banks are in general reluctant to finance real estate. During the crisis real estate financing
was however still possible by means of German Pfandbriefe, a (re-) financing instrument that appears to
defy the current crisis. In 2013 the total Dutch investment market turnover was circa € 5.3 billion
(estimation CBRE). The total new commitments by German Pfandbrief banks in The Netherlands where
substantial in 2013 and amounted to € 1.6 billion (this number includes covered and non-covered assets).
The Pfandbriefbanks play an important role, not only in their domestic market but also abroad. In terms of
new loan transactions 2013 statistics show that, broadly speaking, The Netherlands is a significant market
and an important target country for German Pfandbrief Banks. In terms of outstanding loans at year-end
2013, The Netherlands is fifth largest and a country in which German Pfandbrief Banks have a high
exposure.
The German Pfandbriefbanks have, with a share of 20% of the total outstanding real estate mortgage
loans, a relatively high share allocated abroad (total outstanding real estate loans amounted to € 632.3
billion in 2013). Of the total outstanding real estate loans allocated abroad, 36.41% concerned loans
related to cover assets; assets that fulfil the Pfandbrief Act’s requirements (total cover assets amounted to €
230.2 billion in 2013). Circa 20% of the cover assets are located abroad, of these, around circa 2% were
located in The Netherlands (total cover assets in The Netherlands € 4.6 billion in 2013).
The issuance of Pfandbriefe is bound by the regulations of the German Pfandbrief Act. This Act
incorporates numerous provisions in order to provide safety to investors. One of the central pillars that
should provide safety to investors is the concept of MLV and the fact that property financings may be
included in cover only up to the a limit of 60 % of the MLV.
The determination of a MLV is a precondition for Pfandbrief Banks for finance of properties and re-finance
of property loans by issuing Mortgage Pfandbriefe. The MLV valuation principle is recognised by the
financial services industry in many countries and by various major institutions and governmental bodies.
Unlike the MV, the MLV is a sustainable long-term value based on a lending perspective, whereas the
validity of a MV is limited and based on a fixed date. The determination of the MLV is subject to strict and
detailed statutory provisions laid down by law in the German Pfandbrief Act. This act provides in a section
(BelWertV) that covers the regulations on the determination of MLV. According to the MLV theory the
purpose of the MLV is to provide a long-term sustainable value during the term of the loan that does not
follow the market cycle. The MLV determination of commercial properties is based on a two-pillar principle
(cost value and income value). The focus of the income approach lies on sustainable values that exclude
speculative elements and consequently the MLV must not exceed the MV. As the future is unknown, the
provisions include numerous standardised conservative yardsticks and insights should be drawn from
current and historic prices and from looking at the future. The result is that the MLV is highly depended on
historical fundamentals, to be more specific on rents and yields.
Given the characteristics and clear security of the Pfandbrief, it is statistically evident that Pfandbriefbanks
are able to obtain an exceptionally lower cost of funding when granting mortgage loans for real estate
and public debt. Investors have the advantage of investing in “safe” bonds with a relatively high return.
Property markets are unmistakably influenced by business and economic cycles, but are also characterised
by their own cyclical character. The current economic downturn and the dramatic fall in European real
estate market are historically seen nothing new. There have been many previous examples of booms and
busts for example in the 1970s, 1980s and 1990s and property markets are structurally influenced by a
pronounced cyclical character. These cycles are observable in both, The Netherlands as well as in
Germany, although in the current crisis to a lesser extent in Germany. The real estate market comparison
between The Netherlands and Germany indicates that the overall real estate market in The Netherlands
faced a more negative capital value decline. When looking at the comparison in individual real estate
sectors, it is strikingly evident that the office sector in particular shows a stronger negative capital value
growth in The Netherlands as capital values in in the Germany office sector fell only by circa 15% whilst
capital values in this sector in The Netherlands fell by circa 50%.
47
Several authors argue that one explanation for this can be found in the fact that the majority German
banks use the MLV system, a conservative basis for financing and refinancing real estate, whereas Dutch
and other international banks use the MV, a value that is limited to an effective valuation date reflecting
present-day market conditions as a basis for financing and refinancing real estate. As a result German
banks have been able to finance real estate by means of Pfandbrief throughout the crisis. This reasoning
makes sense as the Pfandbriefbanks have a dominant market share in their domestic market and, with
MLV as a precondition for lending, it allows the Pfandbriefbanks to continue to offer secure lending even
through a financial or real estate crisis. The purpose of the MLV is to provide a long-term sustainable value
during the term of the loan that does not follow the market cycles. The German real estate market has
clearly been less effected by the market downturn than the Dutch market and so the MLV system has
seemed to prove its security. The real estate market in The Netherlands has been more stronger affected in
comparison to the German market during the crisis. So it is reasonable to question whether MLV has the
long-term validity and sustainability in The Netherlands.
The sample validity and sustainability of the MLV in The Netherlands is assessed in this research by
determining the MLV’s of a selection of office properties (suitable for Pfandbrief financing) that have been
bought pre-crisis and sold during the crisis in The Netherlands. These exact transaction dates are an
essential requisite as they “mark” their actual MV’s at the respective transaction dates. The MLV’s of the
selected properties are determined per the first transaction date (pre-crisis). This is done in order to
validate whether the determined MLV’s of the selected properties per the transaction date (pre-crisis) can
be regarded as a truly sustainable. In other words verify whether the established MLV’s do not exceed the
last transaction price.
The conclusion is that the determined MLV’s show a mixed picture. In three cases the MLV’s exceed the last
transaction price, but in one case the MLV is more or less in line with the last transaction price and not
comfortably above the sales price.
From these results the conclusion can be drawn, that the MLV’s of properties in The Netherlands market
are not without fail truly sustainable.
48
6 REFLECTION AND RECOMMENDATIONS

The aim of this research was to carry out a critical analysis of the MLV with a view to ascertaining its
suitability of the MLV in The Netherlands given the objective of MLV and the characteristics of the real
estate market in The Netherlands. The conclusion of this initial research is that the MLV’s of properties in
The Netherlands are not without fail truly sustainable. This conclusion cannot be drawn for the overall real
estate market in The Netherlands as (1) the number of selected properties is too small, (2) the case studies
of the selected properties focus only on Amsterdam and (3) the case studies focus only on office assets.
Given the fact that this study is of office properties suitable for Pfandbrief financing and were transacted
pre-crisis and during the crisis (low investment volume and thin investment market), the available pool of
properties was understandably limited. The choice for the office assets is driven by the fact that this sector
in particular faced stronger negative capital value growth in The Netherlands. Further it should be noted
that the state of repair, level of fixtures and fittings and general quality of a property have a major impact
on the lettability, marketability and thus value of a property. The MLV makes certain fixed assumptions on
operating expenses to be covered by the landlord, and when necessary other running costs not covered by
these expenses are also taken in consideration (covered in the modernization risk, specific to the property
in question). Clearly, if during a crisis a property is badly managed an maintained by a landlord this will
be reflected in its achieved sales price, and thus may have an impact on the outcome of this research.
As a final point I would like to make the following recommendations on the MLV determination and for
further research on this subject. As we have seen that history does not always repeats itself and that the
outcome of the MLV remains highly depended on historical fundamentals, variables such as rents and
yields, really must be critically assessed before adopting them in a MLV calculation. More extensive
research on rents and yields could be conducted to ascertain whether MLV’s of properties in other, non-
German markets are sustainable. This kind of research could take the discussion further as to whether the
MLV also serves its proposed objectives given specific characteristics of other non-German real estate
markets, or conclude that the MLV principle is in fact only best suited to the German market. Additional
research in the Netherlands could be conducted on a different assets class i.e. residential, retail or
logistics. This kind of research could identify that other asset classes are more / or less suitable for the MLV
principle.
Although not a conclusion of this research, it could be added that until such time as it can be proved to
have failed in a widespread number of cases, the MLV Pfandbrief system will likely continue to be a key
European lending method.
49
BIBLIOGRAPHY / SOURCES OF INFORMATION
Literature
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50
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Data
CBRE Valuation Monitor
IPD
51

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THE MORTGAGE LENDING VALUE – A CRITICAL ANALYSIS

MASTER THESIS: G.J.W. WESSELINK

MASTER THESIS: G.J.W. WESSELINK

MASTER THESIS: G.J.W. WESSELINK

1 PROBLEM ANALYSIS AND RESEARCH DESIGN

1.2 Reason & motivation for research

1.4. Problem formulation

1.5 Aims and objectives

1.6 Central research question

1.7 Research design

1.9 Chapter structure

2.2 History and background Pfandbrief system

2.3 Pfandbrief as a financing instrument

Figure 1: Common covered bond structure

MASTER THESIS: G.J.W. WESSELINK

Graph 1: Refinancing Interest rates for Pfandbriefbanks

5 Year Maturity 10 Year Maturity 15 Year Maturity

Source: VDP, statistics/ CBRE Germany

2.4 Size of German Pfandbrief market

Outstanding loan amounts in 2012 and 2013

Figure 2: Risk-/Return relation “Stretched Senior vs. Mezzanine

Source: VDP, statistics

Table 2: Real Estate Financing

Figure 3: Distribution of mortgage loan cover assets by property type

0.50% Other commercial

15.50% Office buildings

Single-family and two-

8.10% Other residential

Source: VDP, statistics

Mortgage lending cover assets by country

Table 3: Geographical allocation covered real estate loan assets

Commercial property financing outside Germany in 2013.

Table 4: Commercial property financing outside Germany in 2013

have the highest share at year-end 2013.

2.5 Mortgage Lending Value (MLV)

discussed Mortgage Bank Act (Hypothekenbankgesetz) dating from 1900.

Figure 4: Mortgage Lending Value vs. Market Value

2.6 The determination of the MLV

Section 1 Income Approach (§8 up to §13)

Capitalization of net income

Remaining useful economic life

Section 2 Cost Approach (§14 up to §18)

Value of the building(s)

Table 5: Principles on the determination of the MLV

Rental income Sustainable net rental income* Actual rental income

Source: VDP, 2014, The Pfandbrief Act/ own editing.

2.7 Security provided to investors by MLV

3 REAL ESTATE MARKET CHARACTERISTICS THE NETHERLANDS VS GERMANY

3.2 Real Estate Characteristics

Direct and Indirect Return

Risk and return

Figure 5: The property cycle

Source: REEFF/ own editing

3.3 Dutch & German Real Estate Market

Graph 2: Value growth Offices

CBRE Offices NL IPD/ROZ Offices NL

Source: IPD & CBRE/ own editing

Graph 3: Value growth Industrial

Source: IPD & CBRE/ own editing