Tags:
Journalism of Courage
With a steady rise in urbanisation,the demand for property information is also accelerating. There is an increasing need for answers to questions like What buildings are on land parcels? How much are they worth? Are they the right buildings for the needs of the population? What public infrastructure and supporting elements are required? Which assets can be used as collateral for new growth?
Thus,valuation gains significance as it is crucial to all such economic decisions and facilitates information flow,financial decision making,performance analysis,reviews,transactions and development advice for all real estate related activities. To this end,valuation also helps answer the most pertinent question of to whom and how much?. But as simple as this may seem,predicting the future is tough,as valuation,which is a soft science,involves a lot of judgment based on different assumptions. Therefore the risks associated with this task are tremendous and require meticulous application of specialised skills.
PROBLEM OF ASSIGNING WORTH
Oscar Wilde once said: A cynic is a man who knows the price of everything but the value of nothing. It could be argued that valuers are forced into being cynics. In the most basic sense,their role is merely to interpret the market to provide a value (price) and not to make judgments as to whether the property is actually worth the price. This is because worth is subjective in nature and varies from one person to the other. However,there is normally a close relationship between price and worth,as prices emerge from a whole series of worth calculations.
Therefore,to enable this tough task,the expertise of the valuation profession needs to be enhanced so that credible financial decisions can be made. This takes all the more precedence as property valuation is currently undertaken by different groups of professionals from different institutes or associations with varying backgrounds and skills.
While corporate valuation is understandably done by chartered accountants,cost accountants and merchant bankers,property valuation is largely considered only as a part of the engineering and architecture discipline and,thus,a degree in civil engineering or architecture is sufficient to become a property valuer.
However,in reality,valuation transcends to other disciplines such as law,economics,town planning,environmental science and accountancy. Moreover,the valuer must keep abreast of changing legislation,emerging economic trends and constantly shifting market forces,which is a rare combination to find in the present scenario with the limitation of relevant educational courses that satisfy these prerequisites.
Consequently,the absence of a developed valuations profession,which remains ungoverned by any specific laws,authority or regulation,has hurt the market and is a serious deterrent to the adoption of both REMFs and REITs,which have the ability to change the sector dramatically by institutionalising real estate and bringing in more transparency.
REGULATORS ROLE
The proposed guidelines make it mandatory for REITs to disclose their valuation methodology as well as the basis of valuation. Each scheme needs to be appraised by an appraisal agency,rated by a credit rating agency,and valued by a qualified valuer,all of whom have to be pre-approved by the regulator. According to REMF guidelines,assets have to be valued at a fair price every 90 days from purchase,by two valuers accredited by a rating agency and the lower of the two values would be taken for the computation of NAV.
However,most of these prerequisites – consistent valuation standards,qualified valuers,rating agencies equipped to rate valuers,valuers approved by the Sebi – are currently non-existent and a major roadblock for REITs.
Another aspect is that of unaccountability and professional negligence,which has given fuel to frauds and monetary losses,where over-/ under-valuations and even forged valuations are being brought to light. One of the more notable instances is that of the infamous Maytas,where the land bank was valued at Rs 1 crore per acre,when the price of land at the time of valuation is believed to be below Rs 10 lakh an acre.
FRAUD CONTROL
This necessitates efforts to license and regulate professionals in order to curb malpractices. Empanelment of valuers,an initiative which is already underway by the Indian Banks Association,aims to establish rules and regulations for the valuation fraternity,ensuring that practitioners possess minimum qualification benchmarks such as adequate educational qualifications,work experience and membership of designated professional bodies,amongst others.
Overall,the need is to bring in consistency and standardisation to instill confidence in the accuracy of valuations,which has been strongly felt by the government,corporate India,the real estate sector and the financial services industry alike. The requirement is for an independent,multi-disciplinary,valuation standards body to be development which will put in place:
* Uniform valuation standards that are compliant with IVSC standards and yet localised to meet local requirements.
* Licensing and regulation of valuers: to appoint valuers as per a predefined framework where practitioners would be regulated and mandated to follow a prescribed ethical code of professional conduct.
* Develop a model educational curriculum for training for valuers,along with the establishment and dissemination of education material such as standards and best practices,guidance notes,valuation information papers to practicing valuers to constantly upgrade their skills. l
The author is managing director and country head at RICS India
