Property valuers and loan servicers may be too cautious when reviewing the European commercial property markets and the approach may encourage excessive conservatism to be built into valuations and work-out strategies, said Fitch Ratings.

Given the continued inactivity in European commercial property markets, Fitch is concerned that the more conservative valuations could impact the credit profile of European CMBS by encouraging special servicers to dispose of properties at depressed prices when resolving distressed loans.

In  order  to  negotiate  the often-conflicting demands placed on them from across  a  range  of constituencies, special servicers have to determine an appropriate  workout  strategy  for each defaulted loan. To help with this, servicers  will typically call upon the expertise of valuers.

Despite being trained  to  a  single  standard  and  with access to the same information, differences  of  opinion  are  not  uncommon  among  valuers.  Receiving an external  valuation  that  it  considers should be readily attainable under prevailing  market  conditions might prompt the special servicer to dispose of  the  mortgaged property - even if this meant achieving a price it would otherwise have rejected.

This, said Fitch, would be especially compelling for properties experiencing income volatility.

"Servicers reacting to valuations selectively, with disposal activity biased towards cautious appraisals, could make conservative views self-fulfilling, thus adversely impacting the credit profile of related CMBS," explained Fitch analysts. "Not only might properties  with  lower  income visibility be marketed more frequently, but potential  buyers  would  be  reluctant  to  bid  above  the revised value."

Fitch said that assessing  how  revaluations  should influence its rating analysis presents a challenge becasue it is difficult to judge when such factors could be at play.

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