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Journal of Property Investment & Finance
Emerald Article: A vision for valuation
Barry Gilbertson, Duncan Preston
To cite this document:
Barry Gilbertson, Duncan Preston, (2005),"A vision for valuation", Journal of Property Investment & Finance, Vol. 23 Iss: 2 pp.
123 - 140
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Downloaded on: 20-06-2012 References: This document contains references to 27 other documents Citations: This document has been cited by 1 other documents To copy this document: email@example.com This document has been downloaded 5639 times since 2005. * Users who downloaded this Article also downloaded: * David Wyman, Maury Seldin, Elaine Worzala, (2011),"A new paradigm for real estate valuation?", Journal of Property Investment & Finance, Vol. 29 Iss: 4 pp. 341 - 358 http://dx.doi.org/10.1108/14635781111150286 James DeLisle, Terry Grissom, (2011),"Valuation procedure and cycles: an emphasis on down markets", Journal of Property Investment & Finance, Vol. 29 Iss: 4 pp. 384 - 427 http://dx.doi.org/10.1108/14635781111150312 John Dorchester Jr, (2011),"Market value, fair value, and duress", Journal of Property Investment & Finance, Vol. 29 Iss: 4 pp.
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PRACTICE BRIEFINGA vision for valuation Barry Gilbertson PricewaterhouseCoopers, London, UK, and 123 Duncan Preston Jones Lang LaSalle, London, UK Abstract Purpose – This paper aims to stimulate debate amongst valuers and users of valuations over what action is needed to ensure the provision of the valuation services that the modern economy requires.
Design/methodology/approach – This paper looks at developments and trends affecting the nature of and the need for valuation services around the world in the short to medium term.
Findings – There is a bright future for those valuers who understand the dynamics in their market and anticipate or always respond to change. The consequence of failing to respond is inevitable decline in the long term. More automated valuation processes and products have an important role to play in the future provision of valuation services. The valuation community must rise to the challenge of developing a professional class of valuers in emerging economies. Governments should insist on good quality valuation in their jurisdictions as they have a major role to play in consumer protection. The leading professional organisations in the world must ensure that collectively and individually they attract the best possible candidates into it.
Originality/value – Whatever the drivers of change in the valuation marketplace, it is fundamental for the survival of professional valuation services that the public interest is protected. This paper considers the challenges and opportunities in a range of areas brought about by these changes – a vision for valuation.
Keywords Valuation services, Valuers, Professional standards Paper type General review Why does valuation matter?
Property underpins a major proportion of ﬁnancial decisions in mature economies.
Failure to ensure assets are properly valued risks ﬁnancial exposure for a wide range
of stakeholders. For example:
banks that use property as collateral for loans;
shareholders that have invested in quoted companies and the companies.
themselves that become vulnerable to take-overs and asset stripping if the properties they own are not regularly and correctly valued in the balance sheet;
A series of corporate ﬁnancial crises around the world have proved that the dangers of
wider ﬁnancial collapse are real (see below):
The domino effect of poor valuation 124 RICS responded to the 1970s property crash in the UK by publishing the Red Book, setting out standards of valuation and professional conduct expected of valuers, while the Federal Government in the USA responded to the “savings and loan” crisis of the late-1980s by insisting on uniform appraisal standards and the licensing of valuers in each State. This led to State Certiﬁcation of all valuers along with the adoption in each State of the annually revised Uniform Standards of Professional Appraisal Practice.
Sadly, the lessons learnt in the UK and in America generally were not applied elsewhere.
Similar problems of poor standards and inadequately trained valuers contributed to the 1994 “Schneider affair” in Germany, the country’s biggest property crash in ﬁfty years. When ¨ Jurgen Schneider’s businesses collapsed he owed DM5 billion to 40 banks and, in some cases, threatened their solvency (Grzesik, 2000).
Likewise, the Bangkok Bank of Commerce collapsed in 1997 under the weight of property loans, exposing weaknesses in other banks in Thailand. However, the risk was not contained.
Globalisation has linked the world’s economies more closely than ever before and the ﬁnancial crisis in Thailand dragged down stock exchanges in South Korea, Malaysia and Indonesia, contributed to the Russian Government defaulting on rouble-backed bonds and almost halted the longest period of economic growth in American history.
The consequences of the Asian collapse are still being worked through. A 2002 report concluded that the growing burden of bad debt threatens Asia’s banks and suggests that non-performing loans totalled a staggering $2 trillion – equivalent to almost 30 per cent of the region’s GDP (Berger et al., 2002).
Most of the national crises exposed wide variations in valuation approaches that led to vastly different, often unrealistic estimates of similar assets and the dangers of fraud or dishonest conduct where valuers were not properly trained or regulated.
The concern to avoid such collapses led to the emergence of valuation standards, ﬁrst on a national and then on an international level. International valuation standards could make cross-border investment less risky and reduce the inherent instability of many stock exchanges by ensuring proper valuations of assets owned by quoted companies. This integrity would reduce the likelihood of a valuation-induced collapse in one ﬁnancial centre potentially triggering a more global collapse.
There is a strong public interest in the integrity of the valuation process. Consistent and transparent standards in valuation are not only the responsibility of valuation professionals, but also that of governments and other stakeholders. The public who use valuation services expect valuers to meet fundamental standards and demonstrate independence (particularly of mind), integrity and objectivity.
Who provides valuation services?
Globalisation has led to a signiﬁcant increase in use of international valuation standards, but a worldwide convergence towards adopting a single consistent basis for valuation services is a long way off. This is partly because of wide differences in entry to the profession, in the training of valuers or appraisers, in client or public perceptions Practice brieﬁng of them and in the ability of valuers to contribute to wider ﬁnancial or economic activity.
Becoming a valuer can mean little more than going through a relatively undemanding state licensing process in some countries. However, in other countries a much more rigorous approach is required involving a minimum standard of a university degree and period of supervised experience, further examinations and peer 125 assessment.
In the USA, the licensing of appraisers is controlled on a state-by-state basis and the recognition of licences between states is very limited. Entry requirements are low.
After a two to three year experience requirement, anybody who has passed the basic State-set test and submitted samples of their work product for approval by the State’s Appraisal Board, can work as a certiﬁed appraiser in that state.
Although there are some large, well known appraisal companies in North America, the market tends to be characterised by small ﬁrms (Appraisal Institute of Canada,
2002) with most appraisers working in only one or two states. Training is focused on appraisal and so even the big companies are unable to provide, or the market is unwilling to accept, the provision by valuers of wider property services like agency and investment. Indeed separate licences are required for brokerage services. Many commentators argue that state licensing in the USA has done little, if anything, to improve standards. Relatively low entry requirements, limited job prospects and a low opinion among graduates and school leavers about a career in appraisal have contributed to signiﬁcant decline in recruitment in North America (Appraisal Institute of Canada, 2002). The profession is left an ageing proﬁle (the so called “greying profession”), exacerbated in many States by restrictions placed on the number of trainees (typically only two) permitted under any one experienced supervisor.
Elsewhere the situation is very different. In the UK a regulatory framework is set by the leading professional body, RICS. Training is based on a broader university education in property, and valuation as a discipline tends to be more highly regarded by clients and institutions (Wyatt, 2001).
Arguably, the UK has one of the most developed markets in valuation services, partly because it has a highly developed commercial property market in which banks, pension funds and insurance companies invest heavily and a mature housing market with a high proportion of homeowners. Elsewhere, the slow development of a property market has held back the evolution of a valuation profession.
Pressures driving demand for a profession of valuers include:
valuation induced ﬁnancial crisis (e.g. Germany, Thailand) or the determination.
to avoid such a crisis (e.g. Poland);
the move towards market economies (former Soviet bloc, developing countries);
While commercial property related valuation in mature markets has become an increasingly sophisticated process, there are parts of the world where demand is yet to start. Here, much valuation work is still generated by the state and may, for instance, arise from privatisation or be property tax related. In China, for example, where there is a very limited property market, valuers largely work for government departments.
JPIF A number of banks in mainland Europe are state owned or backed and have in-house valuation teams. The banks’ desire to improve efﬁciency could well lead to a 23,2 further trend towards outsourcing this valuation work to external valuers, which may in turn change the way the profession is organised.
In many countries valuation is a distinct profession, with valuers working either as sole practitioners or in ﬁrms of valuers. These valuation ﬁrms have generally 126 developed separately from ﬁrms providing other real estate services. In some cases this is simply the result of the way the profession has evolved; in others, such as Spain, it results from a statutory requirement to separate out valuation services.
In the UK, however, few commercial ﬁrms offer valuation services alone. This means the market is dominated by multidisciplinary practices where valuation is often one of a package of services offered to clients, including other more lucrative property-related work. This model has been successfully exported by the large international practices across the world.
What are the dynamics of the valuation marketplace?
The basic purpose of valuation is to give an assessment of what a deﬁned interest in an asset is likely to realise if sold on the open market or its value to the occupying business. Why clients need to know this information and what they want to do with it, inﬂuences the type of valuation and the professional service offered. However, in order for valuers to provide the best possible service, they must also understand the dynamic drivers of the marketplace, both in the commercial property and the residential property sectors.
Some of the drivers in the current market throw up potential new opportunities;
some point towards an uncomfortable future for some valuers; and others threaten the credibility of valuation as a public interest profession. This part of the paper focuses on some of the biggest changes likely to affect the market for valuation services in the short to medium term.
1. Secured lending dynamics The hallmark of a maturing market economy is wider property ownership and the greater use of property assets as security for loans. The asset is used to measure how much to lend and the risk of lending. It then serves as a hedge against the risk of the borrower defaulting.
The effectiveness of this safety valve makes security against property the most common basis for loans and the banks the biggest purchasers and users of valuations.