The following is the speech made by the President recently in Beijing:
Speech delivered at the China Appraisal Society (CAS) Valuation Standards Advisory Committee Meeting at Beijing on 11 September 2010
(The speech was accompanied by a number of documents that are referred to herein, and included in a bundle)
The recent global financial crisis, like many other crises in the past, was one where real estate played a central, complicit role. The crisis itself brought the United States and the rest of the world to almost a "depression deeper that the Great Depression", as narrated by Andrew Ross Sorkin in his Bestseller “Too Big To Fail”. The United States economy and the economy of the world was saved only because they managed to act boldly, as they did, in a coordinated manner, and supported by many other countries from around the world, by pumping billions in stimulus money into the world economy.
The stimulus money was at best a Keynesian measure as when it is withdrawn or as the flow ebbs, the world economy will still need to adjust to a new, sustainable level of consumption and supply of goods and services.
Many eminent authors including Nobel laureates have, since the crisis, dwelt into the causes of the crisis and from the many books that have been published, including "The Great Inflation and its Aftermath" by Robert Samuelson, “The Crash of 2008 and what it means” by George Soros, "Fool's Gold" by Gillian Tett, "Freefall" by Joseph Stiglitz, "The Meltdown Years" by Wolfgang Munchau, "Crisis Economics" by Nouriel Roubini with Stephen Mihm, and "Fault Lines" by Raghuram Rajan, it is clear as to the complicit role of real estate in the crisis, and there are hints that valuations need to be better conducted in a reconstituted new global financial architecture.
To the valuation profession, it must be a cause for concern that real estate played a large and complicit role in the crisis and that it was not just in this financial crisis, but in many or most financial crises of the past. The valuation profession is a profession that operates in the real estate markets, notwithstanding the recent, yet insignificant, efforts to enlarge its role to businesses and financial interests.
Post the crisis, in the search for measures to recalibrate the financial system, or at least to make a start to such an effort, the rating agencies have been singled out because their ratings of the collateralised debt obligations that were built up from mortgages were not accurate enough. It may be noteworthy that light has not been shone at the valuation profession for supporting values for lending purposes that were, with the benefit of hindsight, clearly in bubble territory. Not yet anyway. But that prospect is worth being concerned about, at least as an internal examination within the Valuation Profession. For example, is the mere, timely, opinions of market value sufficient as a support mechanism for lending based on the collateral of real estate? Should not the Valuation Profession contemplate other options such as market worth calculations as well, and for project financing insist on proper and detailed market and feasibility studies as undertaken by Valuers acting also as property consultants, as they do in some jurisdictions?
Valuation Standards can be, and ought to be, substantially strengthened from the current levels to emphasise a clear distinction between market value on the one hand and market worth on the other, and the need for both estimates to be undertaken for effective decision making in the real estate markets. The requirement that market value derives only from valuation models whose inputs (including discount rates) come from market derived data must be given greater emphasis than as is required now. If the inputs are not market derived you cannot call the end result a market value. Valuation Standards especially for more important valuations, for example public domain valuations, must require explicit and substantial justification and substantiation and where required, reconciliation between comparables or between approaches. Valuation models that are developed to estimate the market value of properties for various purposes must be calibrated to the market. Whilst valuation processes for real estate are made more rigorous, similar substantial, justification and reporting requirements must be demanded from Valuers of businesses, including intangibles and financial interests.
The Malaysian real estate valuation framework is fairly robust because:
At the apex, it is overseen by an Act of Parliament, The Valuers, Appraisers and Estate Agents Act 1981 (as amended and as being amended again currently) - See a copy of the Act and Rules in the bundle that accompanies this paper.
The Act is supported by The Valuers, Appraisers and Estate Agents Rules 1986, that can be amended from time to time by the Minister of Finance, usually with advise from the Board of Valuers, Appraisers and Estate Agents. It is expected to be further amended once the amendments to the Act go through the current session of Parliament.
Both, the Act and Rules are further supported by The Malaysian Valuation Standards that is set by the Board of Valuers, Appraisers and Estate Agent under powers conferred by the Act. The Standards are clearly not just principles based but rules based as well and it enables disciplinary action to be taken quickly and arising from any complaint from the public. There is a due process before any punishment is meted out. The Standards are in the process of being amended.
In the Asian context, in particular, purely principle based standards are inadequate for regulating the profession. There is a need for rules bases standards as well and this may come in the form of Best Practice guidelines.
The Securities Commission of Malaysia has much stricter, user guidelines, for public domain valuations. There is also a set of Best Practice Guidelines. See copies of the Asset Guidelines and Best Practice Guidelines in the bundle.
Valuers in Malaysia are usually also professional members of the Institution of Surveyors Malaysia. The Board is the regulatory authority whilst the ISM is the professional body. See www.ism.org.my
Valuers in private practice in Malaysia are usually also members of The Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector, Malaysia. See www.peps.org.my
The Valuation and Property Services Department of the Ministry of Finance is a 2,000 strong public sector valuation organisation that undertakes valuations for taxation purposes as well as many other public sector related valuations and property consultancies. See www.jpph.gov.my. The Department is supported by two bodies (a) the National Institute of Valuation (INSPEN) (www.inspen.gov.my) and (b) the National Property Information Centre (NAPIC) (www.jpph.gov.my). The property sales data and property market data assist Valuers in Malaysia (public and private sector Valuers) in undertaking valuations, property consultancy, property management, estate agency, investment advisory and market and feasibility studies, the latter of which is a
requirement for any project financing by banks. The mere dissemination of substantial real estate data and information results in a more efficient real estate market which leads to a more efficient economy since real estate is a major pillar of any modern economy.
Malaysia is part of the 10 member South East Asian group of countries known as ASEAN. ASEAN has a current population of about 580 million and it is strategically located between the two emerging economic superpowers, China and India. For the past 30 years the ASEAN countries have had a valuation organisation known as the ASEAN Valuers Association or AVA. AVA is now poised for further, rapid growth as the forces of liberalisation sweep through the region, in line with an accelerated agenda that is driven by the governments of the 10 member countries of ASEAN. See www.aseansec.org and www.aseanvaluers.org
The Valuation profession is an infant, in a sunrise industry.
It has miles to go before it sleeps - to part quote Robert Frost.
"It does not matter how slowly you go so long as you do not stop." - Confucius.
This speech was been prepared by:
President, Institution of Surveyors Malaysia (ISM)
All Rights Reserved
Copyright @ 2010 Elvin Fernandez
September 2010
