EBA publishes its final Guidelines on ADC exposures to residential property under the standardised approach of credit risk
The European Banking Authority (EBA) today published its final Guidelines on the treatment of Acquisition, Development and Construction (ADC) exposures to residential property under the Capital Requirements Regulation (CRR). The Guidelines specify the conditions under which institutions may apply a risk weight of 100% instead of 150% to ADC exposures that meet defined credit risk-mitigating requirements. These Guidelines form part of the first phase of the EBA’s roadmap on credit risk implementation of the EU Banking Package. The Guidelines follow a public consultation launched in May 2024 and take into account stakeholder feedback as well as data collected through the related 2024 Quantitative Impact Study (QIS).
The Guidelines specify further the two conditions introduced in the CRR for ADC exposures to residential property to benefit from a risk weight of 100% instead of 150%:
- Condition 1: a significant portion (at least 50%) of total contracts are either:
- pre-sale contracts with a cash deposit equal to or above 10% of the sale price, or
- pre-lease contracts with a cash deposit equal to or above three times the monthly lease rate, or
- sale and lease contracts.
- Condition 2: the obligor has substantial equity at risk, i.e. obligor-contributed equity amounting to at least 25% of the residential property’s value upon completion.
While the first condition remains unchanged compared to the consultation, the second condition has been revised, lowering the equity threshold from 35% to 25% in response to industry feedback and leveraging on QIS data.
In addition, the Guidelines now offer more flexibility for public housing projects, allowing them to meet the first condition if applicant demand exceeds unit supply, even at municipality level. Furthermore, the equity requirement for public housing has been reduced to 20%, and the scope of eligible equity broadened to include committed subsidies, grants, and preferential junior loans. These changes aim to better reflect the specific characteristics of public housing while maintaining a prudential approach.
