Real Estate Exposures¶

Real estate exposures are credit exposures secured by mortgages on residential or commercial immovable property. Under Basel 3.1 (PRA PS1/26 Art. 124–124L), real estate becomes a standalone exposure class (Art. 112 Table A2 priority 7) with dedicated loan-splitting and LTV-banded risk-weight tables, replacing the CRR Art. 125/126 regime.

Definition¶

A real estate exposure is any credit exposure secured by a charge over residential or commercial immovable property. Under Basel 3.1, the framework distinguishes three treatment buckets via the Art. 124 routing rule:

Routing (Art. 124(1)–(3))¶

flowchart TD
    A[RE Exposure] --> B{is_adc?}
    B -->|Yes| C[Art. 124K — 150% / 100%]
    B -->|No| D{Passes Art. 124A six criteria?}
    D -->|No| E[Art. 124J — Other RE]
    D -->|Yes| F{is_income_producing / materially dependent?}
    F -->|Yes — RESI| G[Art. 124G — Whole-loan, Table 6B]
    F -->|Yes — CRE| H[Art. 124I — Whole-loan, 2-band]
    F -->|No — RESI| I[Art. 124F — Loan-splitting 20%/cpty]
    F -->|No — CRE| J[Art. 124H — Loan-splitting 60%/cpty]

The ADC check is evaluated first (Art. 124(3)) — Art. 124A(1) opens "A real estate exposure is a regulatory real estate exposure if it is not an ADC exposure and all the following requirements are met". ADC therefore never enters the Art. 124F–124J channel regardless of LTV, occupancy, or qualifying-criteria status.

Details: See Real Estate — Framework Scope (Art. 124) for the full routing decision tree, mixed-use Art. 124(4) split, and CRR comparison.

The Six Qualifying Criteria — Art. 124A(1)¶

A real estate exposure is regulatory RE (and so eligible for the preferential Art. 124F–124I tables) only if it satisfies all six of the following. Failing any one drops the exposure to Art. 124J.

The calculator consumes the firm's pre-evaluated is_qualifying_re flag — it does not re-derive the six tests in-engine.

Details: See Real Estate — Qualifying Criteria (Art. 124A) for the full criterion-by-criterion breakdown, the self-build carve-out under (a)(iii), and the Art. 124A(2) charge-condition list.

Hard-Test vs Soft-Test: Material Dependency (Art. 124E)¶

Within regulatory RE, Art. 124E classifies the exposure between two treatment tracks:

Residential default rule (Art. 124E(1)): A residential RE exposure is presumed not materially dependent on the property's cash flows. The presumption flips to "materially dependent" only where the borrower has more than three financed residential properties, in which case all subsequent properties enter the income-producing track.

Commercial own-use test (Art. 124E(6)): A commercial RE exposure is not materially dependent if the property is used predominantly for the borrower's own business purpose. Owner-occupied office, factory, or warehouse loans take the loan-splitting track; let-out CRE (rent-financed) takes the income-producing track.

The calculator consumes is_income_producing to route between the two tracks.

Details: See Material Dependency Classification (Art. 124E) for the full default rule, the three-property limit, the own-use test, and re-assessment triggers (Art. 124E(5)/(7)).

LTV Definition — Art. 124C¶

The regulatory LTV used for all loan-splitting thresholds and band lookups is:

LTV = loan_amount / property_value

Numerator (Art. 124C(2)–(3)):

• Outstanding loan balance + undrawn committed amount of the mortgage loan
• Plus all loans secured by charges ranking ahead of or pari passu with the institution's charge (Art. 124C(3) — prior charges stacking)
• Excluding credit risk adjustments, own-funds reductions, and funded/unfunded credit protection (single exception: pledged-deposit on-balance-sheet netting may be deducted)
• Where ranking information is incomplete, the institution must treat other charges as pari passu — a conservative assumption that increases LTV

Denominator (Art. 124C(4)): Property value per Art. 124D qualifying valuation, with revaluation triggers at >10% market decline and a GBP 2.6m / 5%-of-own-funds threshold for transitional pre-2027 exposures.

Two input fields drive the calculator's LTV logic:

Details: See Real Estate — LTV Definition (Art. 124C) for the full numerator components, prior-charges worked example, and Art. 124D valuation rules including the self-build floor.

Risk Weights — Residential RE (Art. 124F–124G)¶

Loan-Splitting — Owner-Occupied / Non-Income-Producing (Art. 124F)¶

Exposure is split into a secured portion (up to 55% of property value) and a residual:

secured_share = min(1.0, 0.55 / LTV)
RW_blended = 0.20 × secured_share + counterparty_RW × (1.0 - secured_share)

Junior charges (Art. 124F(2)): Where prior-ranking charges held by other lenders exist, the 55% threshold is reduced by the prior_charge_ltv before computing secured_share. This shrinks the 20%-weighted portion.

Income-Producing — Whole-Loan, Table 6B (Art. 124G)¶

Materially dependent on property cash flows (e.g. buy-to-let, multi-unit rental to a single landlord). Single risk weight on the whole exposure:

Junior charge multiplier (Art. 124G(2)): Whole-loan RW × 1.25 for LTV > 50% where prior-ranking charges held by other lenders exist. The multiplied RW is not capped at the table maximum of 105% — e.g. a 105% × 1.25 = 131.25% weight is the correct outcome at LTV > 100% with junior charges.

Risk Weights — Commercial RE (Art. 124H–124I)¶

Loan-Splitting — Owner-Occupied (Art. 124H(1))¶

Borrower predominantly uses the property for its own business (Art. 124E(6)):

Income-Producing — Whole-Loan, 2-Band (Art. 124I)¶

Materially dependent on property cash flows (e.g. multi-tenant let CRE, hotel financed by room revenue):

Junior charge treatment (Art. 124I(3)): Where prior-ranking charges held by other lenders exist, the income-producing CRE table is replaced by absolute weights (not a multiplier on Art. 124I(1)/(2)):

Large Corporate CRE — Art. 124H(3)¶

For non-natural-person, non-SME borrowers with non-cash-flow-dependent CRE, a third path applies on top of loan-splitting:

RW = max(60%, min(counterparty_RW, income_producing_RW))

Counterparty Risk Weights — Art. 124L¶

The unsecured residual under loan-splitting (Art. 124F / 124H) is weighted using:

Details: See Real Estate — Residential and Real Estate — Commercial for the full risk-weight derivation, including worked examples and the Art. 124L counterparty table.

ADC Exposures — Art. 124K¶

ADC (Acquisition, Development, and Construction) exposures are loans to corporates or SPEs (not natural persons) financing land acquisition for development/construction, or financing the development/construction itself:

The 100% concession is residential-only and requires both:

• (a) Prudent underwriting — including for any RE used as security
• (b) At least one of:
  • (i) Pre-sales/pre-leases: Legally binding contracts where the buyer/tenant has made a substantial cash deposit subject to forfeiture, amounting to a significant portion of total contracts, OR
  • (ii) Borrower equity at risk: Substantial equity contribution

Details: See Real Estate — ADC Exposures (Art. 124K) for the full qualifying conditions, CRR comparison (no Art. 124K under CRR; Art. 128 high-risk omitted by SI 2021/1078), and key scenarios.

Other RE — Art. 124J (the failing-Art. 124A bucket)¶

Where any Art. 124A criterion fails (and the exposure is not ADC):

The is_qualifying_re input flag drives the Art. 124J vs Art. 124F–124I split. When False, the exposure is routed to Art. 124J before the standard hard-test/soft-test branching.

Mixed-Use Loans — Art. 124(4)¶

A mixed real estate exposure is a single exposure secured by both residential and commercial property (e.g., a mixed-use building with shops on the ground floor and flats above). Art. 124(4) requires proportional splitting by collateral value:

Worked example: GBP 2,000,000 loan secured by mixed-use property valued at GBP 2,500,000 (RESI 60%, CRE 40%). LTV = 80% on the aggregate. Both parts qualify:

Details: See Mixed Real Estate Split (Art. 124(4)) for the full all-or-nothing gate, worked example, and CRR comparison.

Calculation Examples¶

Example 1 — Owner-Occupied House (Loan-Splitting, Art. 124F)¶

Exposure:

• £250,000 mortgage to an individual borrower
• Property value: £350,000 → LTV = 71.4%
• Owner-occupied (not income-producing)
• First charge, no prior charges (prior_charge_ltv = 0)
• Counterparty RW (Art. 124L): 75% (natural person)

Calculation:

secured_share = min(1.0, 0.55 / 0.714) = 0.770
RW = 20% × 0.770 + 75% × (1.0 - 0.770) = 15.4% + 17.25% = 32.65%
RWA = 250,000 × 32.65% = 81,625

Example 2 — Buy-to-Let (Income-Producing, Art. 124G)¶

Exposure:

• £400,000 mortgage to a portfolio landlord with 5 financed BTL properties (Art. 124E(1) three-property limit breached → income-producing track)
• Property value: £500,000 → LTV = 80%
• Materially dependent on rental cash flows

Calculation:

LTV 70–80% band → RW = 50% (Table 6B)
RWA = 400,000 × 50% = 200,000

Example 3 — Owner-Occupied Office (CRE Loan-Splitting, Art. 124H(1))¶

Exposure:

• £2,000,000 loan to an SME (turnover £30m → Art. 124L "other SME" → counterparty RW 85%)
• Office property used for borrower's own business; value £3,000,000 → LTV = 66.7%
• First charge

Calculation:

secured_share = min(1.0, 0.55 / 0.667) = 0.825
RW = 60% × 0.825 + 85% × (1.0 - 0.825) = 49.5% + 14.875% = 64.375%
RWA = 2,000,000 × 64.375% = 1,287,500

Example 4 — Income-Producing CRE with Junior Charge (Art. 124I(3))¶

Exposure:

• £5,000,000 loan secured by a multi-tenant let office; property value £6,500,000
• LTV = 76.9%
• Senior lender holds a £1,500,000 prior charge (prior_charge_ltv = 23.1%)

Calculation:

LTV > 60% and ≤ 80% with junior charge → Art. 124I(3)(b) absolute weight = 125%
RWA = 5,000,000 × 125% = 6,250,000

Example 5 — Qualifying Residential ADC (Art. 124K(2))¶

Exposure:

• £10,000,000 development loan to an SPE building 50 residential units
• 60% pre-sold under legally binding contracts with substantial forfeitable deposits
• Prudent underwriting confirmed by credit committee

Calculation:

is_adc = True, is_presold = True → Art. 124K(2) qualifying residential ADC
RW = 100% (vs 150% for non-qualifying)
RWA = 10,000,000 × 100% = 10,000,000

CRR vs Basel 3.1 — Key Differences¶

Details: See Key Differences — Real Estate for the full CRR vs Basel 3.1 comparison and transitional treatment.

Underwriting Standards — Art. 124B¶

Article 124B is a governance precondition for originating real estate exposures applicable to all RE — regulatory RE, other RE, and ADC. Institutions must operate an underwriting policy that, at a minimum, requires assessment of the borrower's ability to repay.

This is not a calculator input — compliance is evidenced by underwriting policy documentation, credit-committee approval records, and PRA supervisory review (CRD Art. 79, SS31/15 ICAAP). A breach does not automatically reclassify exposures into Art. 124J; supervisory enforcement is the remedy.

Details: See Real Estate — Underwriting Standards (Art. 124B) for the full firm-governance scope and relationship to other Art. 124-series provisions.

Input Schema Summary¶

Regulatory References¶

Next Steps¶

• Retail Mortgage — retail-class boundary
• Covered Bonds — Art. 129 RE-backed securities
• Standardised Approach
• SA Risk Weights specification (Basel 3.1)