Comments on the Hand Book on Policy Standards and Procedure for Real Estate Valuation

By Er. SC Thukral FIE(I) MBA FIV, FICA

Jammu scthukral@rediffmail.com

The Real Estate sector have witnessed a sharp growth in the last decade and it have became a highly profitable venture, the Banks and Financial Institutions have been much liberal in the funding of mega Real Estate Projects, funds worth billions of Rupees have been tied up in these projects but the situation was not as rosy as projected by the Mega builders and promoters of these projects, in many cases the Banks have burnt their fingers and as usual the Valuer is the first person to be the scapegoat, it was observed that the valuation procedure for the valuation of real estate projects was not adequate to serve the changing business environment and there is an urgent need to study the system and prepare a guide lines for the procedure involved in valuation which is required in the process of funding real Estate Projects.. For this purpose a high level committee was formed under the chairmanship of a high ranking eminent Banking Professional, Shri Sridhar, Chairman Central Bank of India and MD National Housing Board, assisted by Prof. Dr. PSN Rao HOD Housing, Delhi School of Planning and Architecture, based on the study a document prepared named as “Hand book on Policy, Standards and Procedures for Real Estate Valuation by Banks and HFIs in India” the contents of this document are available on the web and comments have already been offered by fellow Valuers through the pages of Indian Valuers, definitely the Valuer fraternity, particularly the Institution of Valuer must have concern about the events activities taking place in the National and International level directly or indirectly affecting the Valuers profession, however it is a state of sorry that Institution of Valuer who have National and International presence, having pool of more than 20,000 multi disciplinary expert Valuation professional continuously working in this profession for the last more than 40 years was not consulted at all.

It is important to conceptualize the fundamental of Valuation, we can say that the process of Valuation is as old as human civilization, it started with the exchange of goods and services in the society, may have been with the exchange of goats with cows, but with the overall expansion in the size of Economy, liberlisation and globalization the Valuation have become very vast subject, it cover almost every thing which have value as on today or in the near future, all types of assets, Semi Tangibles, Tangible and Intangible assets, today the services of Valuers are needed not only in the housing sector but needed to the Micro Small and Medium enterprises, large corporate Sector, which add to the production Distribution and services, in Agricultural sector, in the valuation of Gems and Jewelry, Art work, Financial instruments as shares, debentures, Hundis receivable, the scope of Valuation have enlarged to Hydel Projects. Entertainment Parks, ship Building, dock yards, Nuclear Plants, Space shuttle

and so on, in general services of valuers are required in every sphere of economic activities and not only limited to Real Estate sectors It seams the Valuation Hand Book study have bean focused on Real Estate only that is of course an important part of the Valuation works but do not covers the subject as a whole.

Therefore a comprehensive policy procedure is needed on the process and parameters of valuation covering all aspects of asset put under screening, not only it’s physical state but it’s economic usefulness and marketing strength, which go on changing with the changing environment in the society and it is also required to forecast the future possible changes affecting the value of asset. Again the procedure adopted should be convenient purposeful and objective in nature to suit the size of Enterprise nature and value of the asset, MSME may be operating in Trading, Manufacturing or it may be a service provider it would like to avail the services of a valuer under one roof from where he could get the valuation services of his all the assets, ie his office Building, Factory Shed, Process Machinery or Utilities, it may be stock inventory or any other asset and valuation may be through a single valuer or multi disciplinary group of professional.

As far as the valuation of real Estate is concerned, the modern Buildings are not only four walls and roof, but the development of Technology have made these more complex in nature, these have come out with the effort of multidisciplinary specialist, right from the services of Geologist, a seismic specialist, an interior decorator, space utility and functional design specialist, the Architecture the structural designer, an Electrical Mechanical Engineer who can design and get executed for internal external electrifications Captive power, cold and hot water supply, Lifts escalator, HVACR Fire detection and Protection system, Audio, Video and computer networking, Security and surveillance system, Sewage and Garbage disposal and so on like Lightening Protection in the area prone to lightning. These services comprise 35 % to 45 % of the cost of building and with the changing Technology more and more such like comforts are being added, it is a multi disciplinary effort, the value of a High rise building will depend upon it’s structural strength associated with the comforts and safety available with the addition of services through the use of viable Technology, again there is a requirement of Multi disciplinary skill to arrive at the reasonably accurate value.. An Architecture, a Town Planner, Quantity surveyor can be a better Building Manager but he is bound to avail the services of other discipline skilled professional and so it shall be only a Corporate body/ Association of persons having multi disciplinary pool of expert professional can accomplish the task of valuation in the better way.

Criteria for Registration as Valuer Clause 1,2 Coming to the criteria for registration as Valuer it is appreciated that in the

Hand book it have been pressed upon that beside Technical qualification a Valuer should have Membership of a professional Body and in this context

institutions of Indian origin (5 Nos) and of Foreign origin (3 Nos) have been mentioned, but it is equally important that any Institution entrusted with the job of Membership for Valuers must have long time, proven reputation of high Standard and should have moral ethical values, maintained over a period of time, such Institution must have in built capacity to deal with the issue relating to the Valuation profession, well connected with the changing business and economy of the nation well in a position to proliferate useful information and provide guidance to their members on the subject, an institution that can create professional capability and ethical values among the members and such an institution should be kept on the watch list for some fixed duration of time only then it’s membership be given recognition.

It is also observed from the Hand book that Diploma Holder are also to be registered for Valuation work up to the asset value of Rs.50 Lakh, this provision may not work well, in the present scene of job market in India, the country have large availability of Technical Graduate and Post Graduates super specialist in their subject, Institution of Valuers have on it’s membership role highly qualified and experienced Technical professional who have held high position and remained top most functionaries in the government and private sectors/PSUs so equating them with the undergraduates will just create bridging a wide gap without any useful purpose, moreover the Diploma holders are not eligible for the membership of a well established and reputed Institution like Institution of Valuers and at the same time Hand book have stressed upon the Valuers to have membership of a Professional body. in the situation registration of Diploma Holders as Valuer may not sound well. .

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Registration of Valuer with the Government 1(e) So far registration of Valuer with the Government is open to the

Individual only, it is a welcome step that IBA have made representation to the Min. of Finance that that Valuation by companies should be permitted, as in the present age of globalization of business individual’s capacity may fall short of the volume and requirement of the valuation work, more over in the age of globalization and with the enactment of W.T.O a valuer may have to take up international role which may not be possible by an individual, India have a large pool of Technical and Managerial professionals sincere and hard working it is suggested that valuation work may be undertaken by an individual, an Association of person, partnership firm, Private and Public Limited company or any other business entity but their registration and categorization be done based on their strength their ability to deliver quality valuation work, such business entity must have pool of human resources should be equipped with responsible and experienced multidisciplinary professionals so as they can handle the complexity involved in valuation

Professional Fee (1.6)

The hand book provide that the valuer’s Fee be negotiable depending upon the work involved and value of the asset. In this connection GOI Min of Finance department of revenue, Central Board of Direct Tax have issued Notification dated 30th January 2009 No 15/2009/F(149/144/2008-TPL) wherein Scale of Fee to be charged by a Registered Valuer have been notified. The Fee paid to valuer is not only for the quantum of work involved but a high degree of responsibility associated with the work shouldered by a technically qualified skilled and experienced professional, improper Fee will drastically restrict the availability of qualified skilled and reputed professionals for the Bank/ FIs, which shall not be desirable for them, defiantly they would like that only the competent persons be on their roll, therefore it is suggested that Valuation Fee fixed by the Banks should be at least commensurate with, what is prescribed by CBDT, this would bring a good amount of talent available at the disposal of Bank and will benefit Banks/FIs in the long run.

Continuing Education (1.10)The Hand book have provided continuing education programme for the

valuers through training, seminars, conferencing workshops and other capacity building measures and IBA should endeavour to facilitate the conduct of such programmes, it is again a welcome step, in this concern Institution of Valuer have already taken up this task since it’s inception, The Institution is already educating their members through it’s monthly magazine Indian Valuer, through various seminars, conferences meets and other interaction sessions, the magazine is also an inter acting where members can get answers of their questions and get their doubts clear, this way Institution have ready built infrastructure for imparting education on the subject of Valuation and can help IBA to fulfill their requirement of continuing education

Valuation Standards (Part B 2.1 -2.6) Quite elaborated Standards have been provided in the Hand Book, these

Standards are very useful in the job of valuation and should be adopted by valuers in letter and spirit, however in the age of Globalization, Standards developed by the International Standards Organisation (ISO) which are relevant to the valuation should also to be referred and there should be an arrangement of continuous improvement in the valuation Standards. . . Procedure for conflict resolution (3.4)

It has been agreed that there are bound to be a variety of conflicts in the process of valuation and Hand book have laid down that every Bank/HFI must have Bank Valuation conflict Resolution Committee for addressing of all conflicts and arriving at an amicable solution, this is a nice step as long as the dealing of the valuer is limited up to a particular Bank only, however as the scope of Valuation work have been enlarged and not remained limited to the Banks and housing Finance Corporation, the Valuer should be made responsible to society at large ie to all those persons/entities availing his services , it is suggested that performance appraisal for the services of valuer should be done by an

unbiased and an independent professional body having no interest with the person/entity availing the service of valuation or with the service provider ie Valuer an Institution well versed with the process of Valuation, capable to judge and evaluate the work done by a valuer and if any deficiency infirmity are malpractice is found it should penalize the professional valuer, in this context Institution of Valuer or any other Institution of similar status is an appropriate body. However since the Banks are availing the services of valuer in consideration of money they are at liberty to choose any valuer professional according to their conveyance and specific need without any interference from such an independent body..

Hand book is the outcome of massive efforts made by the top most functionaries of Banks and others, it is an original study and work of first time in the area of Valution process and procedure, however there is always remain scope for improvement and therefore discussion, debates suggestions are needed before it is finalized and put in practice by those beneficiaries and have stake in the valuation, In this context comments from business associations as FICCI, ASSOCHEM can also be useful.