RICS launched its first Indian edition of RICS Valuation Standards-Global and India. Also called the “Red Book”, it contains valuation standards for the Indian property market.
What are the problems with valuations in the Indian real estate market?
There are multiple and wide-ranging issues that impact the valuation practice in India. The most important one is the absence of any Act or industry regulatory body to regulate valuation practice. Anybody connected with civil construction can style himself as a “valuer” and conduct valuation for properties. As a result, there is no standardization even in the basic principles of valuation practice or norms for valuing assets.
Thus valuers have a lot of flexibility in tweaking assumptions, calculations and approaches. There is also a risk of the “basis of valuation” and its computation being suitably changed to meet the figure expected by a client. The Reserve Bank of India (RBI) has recently highlighted inflated property valuations for the purpose of loans as a concern and instructed banks to be more prudent in future. All these issues that tend to be more prevalent in emerging markets like India have contributed to the existing challenges pertaining to valuation of real estate companies, market value of land banks and property assets.
Sachin Sandhir, managing director and country head, Royal Institution of Chartered Surveyors (RICS)
Also, disclosures made by real estate developers prove there are no standards of valuation. In some cases, inflated valuations are based on assumptions about future values. What could be the problems associated with faulty valuation of a property?
Yes, this is a major cause of concern and recently highlighted by RBI, which reinforces the gravity of this issue. RBI has observed a high incidence of cases where property values were inflated in the quest for higher amount of bank loans. Sebi (Securities and Exchange Board of India) has also, in the past, raised this as a concern clearly stating that futuristic assumptions were being applied to calculate the present valuation of properties, resulting in inflated land banks and market valuation of real estate firms.
RBI has also pointed to a nexus between independent valuers appointed by banks and a section of real estate developers, which is never ideal. All these issues are threatening the health of the financial ecosystem and are primarily due to the lack of any regulation or standards that valuers are required to follow.
How can the Red Book on valuation be helpful for the Indian real estate market? And what kind of professionals and agencies can use the book?
The India edition, the first of its kind initiative in Indian real estate, will conform to globally consistent standards along with local guidance on valuing assets for different purposes. Its standards are not only based on International Valuation Standards (IVS) (equivalent of IFRS in valuation) and hence recognized worldwide, but also provide an additional framework and guidance whereby valuers can implement the standards.
In addition to these global standards, the India edition contains local guidance for important valuation applications such as financial reporting under Indian accounting standards, bank lending for residential and commercial properties, taxation purposes such as wealth tax or capital gains tax, and valuation of development land.
It is already mandatory for all RICS members practising valuation to adhere to the Red Book standards. Apart from banks and financial regulators, the book would be a benchmark standard for overseas and domestic investors, majority of whom demand valuation in accordance with the book while making important investment decisions.
The land and revenue departments of state governments who release land for new development and determine guidelines for property taxation, would also benefit from Red Book standards.
How can a homebuyer in the secondary or primary market benefit from this book?
It enables individuals to transact (buy/sell) property vis-a-vis an accurate estimation of the market value of a property. In case of home loans and loan against property, if the valuers engaged by the bank for underwriting home loan are individuals who undertake valuations as prescribed by the Red Book, the property values thus estimated would be more accurate and consistent and buyers would be assured of permissible loans on more reliable valuations.