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<Real estate – From the margins to the heart of European Union policy
11-01-2014

Real estate – From the margins to the heart of European Union policy

By Michael MacBrien, director general of the European Property Federation and Roger Messenger, chairman of TEGoVA, The European Group of Valuers' Associations

Real estate is a good marker of European integration. It tracks how the EU has evolved - from trading block to economic and political Union.

In the fifties property was irrelevant to the common market even though on parchment there was free movement of capital and freedom to provide services, the keys to cross-border property investment and advice. But in reality, it took thirty years to free capital movement through secondary legislation and another twenty to fully free property advisers via the Services Directive.

And none of this really mattered because offer preceded demand. There was no significant cross-border property investment until the mid-nineties and property service providers largely follow the investors so for our industries, 'Europe' is twenty years old, tops.

Then there are the different kinds of regulation that target real estate, notably environmental, energy efficiency, social and consumer protection rules, but those policies emerged over the last twenty years. Contrary to widespread innuendo, there was no EU 'policy creep' apart from a little European Commission environmental creativity in the seventies. Each new policy area became EU competence through a series of Treaties unanimously agreed by the member states. Besides, subsidiarity works both ways: sometimes the scale of the challenge demands pan-European solutions. With buildings accounting for 40% of greenhouse gas emissions, both the needs of the planet and a level EU Internal Market playing field demand that everyone sign up to near-zero energy new buildings, energy efficiency renovation and certification, boiler and air conditioning inspection and replacement, and smart meter roll-out according to the same rules. What's important is that building owners be involved in debating those rules, as EPF has been since the inception.

And then came Lehman, the tipping point for the EU's relation to real estate, as in the minds of leaders and mob alike, real estate and mortgage lending were perceived as the core of the crisis. The sea change came in two waves: EU takeover of financial services regulation and EU Economic Governance.

Capital requirements zeroed in on real estate exposure, real estate got caught up in regulation of fund managers, and mortgage credit, that had escaped EU regulation for thirty years, finally got its own Directive. That last piece of law in particular illustrates the political transformation of the EU.

In the 80s, Mortgage credit was dropped from the Delors/Cockfield list of directives needed to complete the Single Market because potential demand for cross-border mortgage banking didn't seem sufficient. That flowed from the pure-business approach Europe was stuck in at that point in its development. If in those days people in some member states had been jumping off their roofs because of abusive repossession, the reaction would have been that it was a shame, but not the EEC's business. Now it is, and the Mortgage Credit Directive provides all borrowers with a panoply of protections from predatory lending practices. This is fundamental: the Union is now much more than a trading block, it is a polity that has a duty to watch out for its citizens. To ensure that protection, it has to cast a longer arm that covers a lot more real estate.

But that doesn't mean detailed 'red tape' because the means of intervention is still 'light touch'. Take valuation practice, previously virgin EU territory now at the heart of financial and real estate market reform. The Alternative Investment Fund Managers' Directive covers valuation, but basically to ensure that funds' external valuers are registered and have sufficient guarantees of professionalism and that proper and independent valuation of assets is performed in accordance with the applicable national law.

Now the Mortgage Credit Directive demands that member states develop reliable property valuation standards and ensure that bank valuers apply them, but goes a step farther than the AIFMD, insisting that, to be considered reliable, valuation standards should take into account internationally recognised valuation standards such as, inter alia, the European Valuation Standards (EVS) developed by TEGoVA .

Thus, even though the EU now legislates on real estate, it's a principles-based approach leaving as much detail as possible to the member states and not legislating at all if the policy area isn't covered in the Treaties - housing policy and property taxation being cases in point.

But there is a European paradox exemplified by real estate - power should be as local as possible but the EU/Eurozone is increasingly a single economy, certainly in terms of the systemic effect of bad national economic policy. National budgetary equilibria combined with growth friendly national policies are of EU strategic importance and all governments want to talk each other out of making the wrong moves. Yet nobody wants the straightjacket of harmonised EU legislation. The way around this is dubbed 'EU Economic Governance' and it puts real estate centrefield.

Economic Governance involves no legislation; governments just tell each other what they have to do to get into shape. For Eurozone countries, not taking the collective 'advice' can mean a fine of 0.1% of GDP. A central problem is inducing growth without worsening budget deficits. The idea is that even if budget deficits don't allow for overall reduction of the tax take, at least the burden can be shifted away from taxation of labour to "taxation that is less growth-unfriendly", notably recurrent property tax with special emphasis on updating the cadastral value on which the recurrent property tax is based. Countries aren't being told how to do this or what tax rates to set or how to adjust taxable values; just to get the job done.

The European Council is also focussing on rationalising planning law, construction law, housing rental markets and retail development, all seen as major drags on the economy in many countries, and EPF and TEGoVA have seized the opportunity. For many countries, there is in particular an historic opportunity to review outdated housing market regulation and improve people's access to quality housing. Spurred by EU Economic Governance, this has already been achieved in Portugal in just two years.

Realising that many countries in need of planning and housing rental market reform have not yet been targeted and that for those that have it is crucial to apply the right reforms, EPF has organised its member associations and invited allied European federations to help the European authorities fill in the blanks.

See table European Semester 2013 - European Council Real Estate 'Recommendations' attached

TEGoVA has been a precursor of European trends, creating European Valuation Standards that adapted valuation practice to EU policy long before the Mortgage Credit Directive gave EVS the imprimatur of EU law. Conscious that a European pool of valuers qualified to a recognised European standard would be a fillip to cross-border investors and to market safety and security, TEGoVA developed the Recognised European Valuer (REV) system which today comprises a pan-European elite of over 2,000 professionals.

TEGoVA is also organising a Forum on Valuation for Taxation Purposes serving to advise the European authorities and governments national and local on how to implement EU tax valuation recommendations.

As things stand, EU policy seems to have reached a form of equilibrium - respect for the local nature of real estate and recognition of its central role in the economy.

Different versions of this article appear in Europe Real Estate and Valuer