'Valuation norms vital'

In conversation

Economic globalisation and foreign investment in real estate has necessitated development as well as adherence to International Valuation Standards (IVS). Realtors around the world have been looking for standards that would be uniformly applicable globally and would facilitate transnational investment in the sector.

The end of the cold war and sweep of liberalisation across the continents mounted pressure on governments to think of setting up credible mechanism that could free real estate from forces dictating either demand or supply.

Though the Americans had developed their valuation standards around 1980, international standards were first set in 1994.

These were improved and expanded in 2000 and modified further to be compiled in a 500-page catalogue in 2007.

 The IVS were framed in a situation where lack of published information, volatility of property markets and excessive government intervention had introduced much confusion. Homogenising international markets needed setting up uniform norms and seeking their application all across the world. The Indian real estate market too began responding to the need to train property valuers as independent professionals in sync with the changing international scene. The National Association of Realtors (NAR) is planning to bring in the 120-hour course for valuers in association with the National Housing Bank (NHB).

According to Farook Mahmood, founder NAR, such independent professionals will help the banks and financial institutions in mortgaging or lending against property. A beginning was made in this direction by organising a two-day course in seven cities including Bangalore across India to impart basic training to valuers.

Gheorghe Badescu is a trainer in International Valuation Standards and has been a Fellow of the Royal Institution of Chartered Surveyors (FRICS) since 2004.

Of late, he has been training property valuers around the world. He conducted a two-day training course on ‘Professional valuation of real estate’ in Bangalore earlier this week in association with National Association of Realtors and Bangalore Realtors Association of India (BRAI).

A Romanian, Badescu has trained hundreds of valuers in nations in Eastern Europe that joined the European Union during the last two decades and in Africa. He was earlier vice chairman of International Association of Valuation Standards in 2005-2008 and is a member of the Standard Board currently. Excerpts from an interview:

Why the need for IVS?

Standards are now the norm for services sectors such as auditing, accounting, banking, capital markets, insurance, environment and quality assurance. So also for real estate business.

Though the concept of property valuation first emerged in the United States and standards were written as internal regulation, the need for international application became imperative as globalisation set in and norms were needed to build public trust. It was also essential to develop a common terminology, to promote best practices, set technical standards for valuation and rules to govern the valuers’ behaviour.

Is the IVS finding acceptance across the world?

Several countries such as Canada, Australia, New Zealand and South Africa have adopted the IVS. Similarly all countries in the Latin America too have adopted it. A joint committee is bringing the US valuation standards in line with the IVS. Russia and China had framed the norms earlier than IVS came into being and are almost compatible with it. The British standards are also merging themselves with the IVS. Almost the whole of Europe is now following EU standards which were modified on the lines of the IVS. In India, the Institute of Practicing Valuers is following it. Even the Indian Parliament enacted a law that made it mandatory for the Real Estate Investment Trust to adopt the provisions of IVS for valuation. Pakistan Stock Exchange has asked its listed real estate firms to follow IVS.

Why the need for code of ethics for valuers?

Valuers are independent professionals like doctors or judges. There is need to see them as persons who act ethically, without fear or favour of clients or sellers and are competent to understand the market forces, property intangibles and apply sound judgment etc. Therefore the Code of Ethics calls for fixation of fee for valuation not in relation to the value or size of the property but the time and effort spent. Similarly, valuers are not supposed to charge any ‘success fee’ if the transaction materialises. They also need to declare the conflict of interest as judges are supposed to do in cases pertaining to litigants with whom they may be related. There are even clauses for confidentiality and sound judgment.

In India we have the practice of interested parties buying up land near places where projects such as railway lines, canal or airports are coming up. How does the IVS look at such factors? How could the valuation norms be applied in such circumstances?

It is one form of insidious corruption where political information is used for personal profits.

IVS takes care of it. In such cases, the values of the property have to be determined on the basis of the market value a day before the announcement of the project or information becomes known. It provides for safeguards against speculation on the basis of political information.

IVS also takes care of factors such as minerals found beneath the land or air space over the property to address environmental concerns.

While in most countries resources beneath the land are the national assets, the IVS has valuation norms for extractive industries on land. Laws in the US are more elaborate and differentiate between the right to use of property and right to ownership. Utilities can pass through private properties and people can have the right to use their houses without owning them in places where highways or railways are being laid.