By Ramon L. Clarete
[Published first in Business World Online 06.01.2019]
An important lesson of the 2008 global financial crisis is that unstable real estate markets can bring down the global economy. Corollary to that, they can deprive an emerging economy with financing, stunting investments and economic growth.
The Philippines has enjoyed impressive economic growth in the last six years. Sustaining that growth to at least 7% annually requires, among other things, adequate financing of investments. But without sound property valuation practices, it would be difficult to ensure the right flow of credit into the economy in order to mitigate lending risks.
Appropriately regulated and managed real estate markets are needed to sustain strong economic growth. Keith Lancastle, CEO of Appraisal Institute of Canada, described how strong property valuation fundamentals helped Canada’s economy weather better the global crisis in 2008.
In the Philippines today we are nowhere near that capability, thanks to how we had implemented the 2009 Real Estate Service Act or RA 9646. The law aims to “… develop and nurture through proper and effective regulation and supervision a corps of technically competent, responsible and respected professional real estate service practitioners whose standards of practice and service shall be globally competitive and will promote the growth of the real estate industry.”
RA 9646 will be 10 years old in July. If it has accomplished anything at all, it would be in the number of real estate practitioners licensed by the Professional Regulatory Commission (PRC): roughly, the number of licensed valuers increased at least tenfold over this time.
By several measures, though, the average quality of valuation service unfortunately has taken a deep dive. According to one expert estimate, “90% of all appraisal license holders don’t actually have any idea how to do the appraisal.” The opinion came out sometime in August 2018, nine years after RA 9646.
The Professional Regulatory Board Real Estate Service (PRBRES) under the PRC should be held accountable for that. The law gave it the mandate to regulate the profession, and it has yet to deliver the result.
One indicator of success is that several formal educational institutions would already be running degree programs in real estate management. To date, I count no more than two institutions doing that. That was about five years ago, and I don’t know if the degree programs have graduated students already, or whether they still exist at all.
This is understandable. It takes time for formal institutions to adopt real estate management as one of their regular programs. But 10 years is a long period of time. Elsewhere in the region, Malaysia has already reached this level of maturity of its valuation practice.
Given that formal education in valuation is out of reach, at the very least the PRC should effectively enforce the quality of the training to be conducted in preparation for license examinations.
Instead, in the case of the assessors/appraisers, it downgraded the requirement of training in the law. RA 9646 allowed government assessors and appraisers who applied for licenses two years after the effectivity of the act to be granted the license without examination. The condition is that they must have had 10 years’ experience as an appraiser/assessor and undergo 120 hours of training.
The PRBRES downgraded the 120 training hours into 60 lecture hours and 60 on-the job-training (OJT) hours to be certified by any licensed appraiser. Without the capacity to sufficiently monitor, the Board has effectively departed from the provision of the law by reducing training hours by half. With the thousands of grandfathered licensed practitioners, the regulator could not have ascertained the quality of the OJT hours conducted, or if they had happened at all.
But does this really matter? Well if it does not, there should not have been any need for RA 9646. But there is! If 90% of our appraisers are not qualified, “lenders, mortgage insurers and mortgage brokers would not be able to verify the value of a property during a mortgage underwriting process. Governments would be unable to value their public assets and regulators would have no policies to mitigate risk and guide real estate transactions,” to quote Lancastle. On an individual basis, if one is selling his/her real estate they may stand to lose from amateur values prescribed by unqualified but licensed valuers.
Appraisers from other countries could take over and provide real estate valuation services for the likes of foreign banks, which BSP has accredited to operate in the country. But that poses a problem: they don’t know the intricacies of the local market. What we would have then would be a very unstable real estate market, which constrains investment and economic growth.
The global valuation community has moved into harmonising asset valuation standards under the International Valuation Standards (IVS), with 2017 as its present version. The International Valuation Standards Council (IVSC) develops and maintains IVS.
As a country we are not completely out of the IVS. There are a few organisations that the IVSC includes within its global network. The Bureau of Local Government Finance of the Department of Finance is one of these, as an Institutional Member. In terms of non-governmental organisations, the Institute of Philippine Real Estate Appraisers (IPREA) is recognised as a Valuation Professional Organisation (VPO) and the Philippine Association of Realty Appraisers (PARA) has an Associate Valuation Professional Organisation (Associate VPO) status. Other practitioners, however, are still following valuation standards other than the IVS.
But the public sector needs to do more to signal to the global community that we follow IVS, in the same way that the Securities and Exchange Commission had required all companies to follow the International Financial Reporting Standards (IFRS). In globalised markets, we need to abide by these standards to stay competitive.
December 17, 2018, was the date for the Bureau of Local Government Finance of the Department of Finance to officially launch the second edition of the Philippine Valuation Standards (PVS). Compared to the first edition, this one adopts in Part I the IVS 2017, updating its use of IVS 2007.
Parts 2 and 3 cover departures of PVS from the IVS. Departures are allowed under IVS 2017 provided they are taken to satisfy legislative, regulatory or other authoritative requirements. In Part 2, the PVS gives the Philippine context focusing on valuation for taxation and other purposes. Part 3 comprises guidance notes for appraising multiple properties as of a given date by a systematic and uniform application of appraisal methods and techniques that allow for statistical review and analysis of results.
Branding matters. While, it can be said that PVS is IVS-compliant, it nevertheless would be confusing. R. Narayanaswamy, the Chairperson of the Committee to advise on valuation matters constituted by the Government of India, Ministry of Corporate Affairs said that “renaming the book (e.g. from IVS to PVS) could create confusion.” In India, they also have national sensitivities, but they are only introducing minimal departures, following in line with their approach to IFRS.
Ramon L. Clarete is a professor at the University of the Philippines School of Economics