Should the loans that banks grants to build a first home, as a part of the normal business process, where the repayment of the financing comes from the sale of the property to the first buyer, without a speculative purpose of resale, and on the basis of the credit risk valuation of the borrower’s financial strength, be considered as speculative immovable property financing under Article 4(1)(79) CRR?
According to Article 4(1)(79) CRR “speculative immovable property financing” means loans for the purposes of the acquisition of or development or construction on land in relation to immovable property, or of and in relation to such property, with the intention of reselling for profit.
The definition above clearly states that the intention of the counterparty is to resell with profit, this is, speculative purpose. Some doubts arise when considering the following situation: a bank grants a loan to a company for the construction of a building, specifically homes, for to sell them, but the land acquisition is not financed. In this specific case the intention of the counterparty of the loan is to build and sell, as a normal business process, as in whatever industry, but there’s no reselling, this is, speculation purpose is not present.
According to Article 4(1)(79) of Regulation (EU) No 575/2013 (CRR), a loan to a development company for the construction of an immovable property, with the intention of selling it for profit to a third party, meets the definition of “speculative immovable property financing”. In this context, it is not relevant whether the land acquisition is not financed, if the construction on the land is.
For further clarification on the application or preferential treatment to residential property “which is or shall be occupied or let by the owner” according to Article 125 CRR, see also Q&A 2304.
Additionally, according to Article 128(2)(c)
(d) CRR speculative immovable property as defined in Article 4(1)(79) CRR is included among the “exposures with particularly high risks”. As clarified in Q&A 2268, no qualitative criterion allows the exposures listed in Article 128 (2) CRR to be assigned a lower risk weight than 150%.
Update 16.09.2021: This Q&A has been updated in the light of the changes – applying from 28.06.2021 – introduced to Regulation (EU) No 575/2013 (CRR).