Property valuation has been a requirement of the rulers from times immemorial. In recent history, the first tangible notions of value and valuation in India appeared and appraisal work came in vogue as a result of compulsory acquisition of land by the government of the time for promoting public welfare.
For compulsory acquisition of land, the earliest legislation was Regulation I of the Bengal Code 1824, which was primarily intended for enabling the officers of the government to obtain a fair valuation of the properties for public purpose and pay the landowners a just and fair compensation. Thereafter, the first enactment — the General Land Acquisition Act was passed in the year 1857. This Act provided for payment of compensation to be settled by arbitration. Invariably, the lack of a competent body of valuers to fill in as arbitrators led to the courts deciding on matters related to valuation.
Subsequently, the Land Acquisition Act of 1894 was enacted. This Act is the parent of various other legislations, which severally and jointly empowered various authorities to acquire land. These Acts were the Calcutta Improvement Act of 1911, the Bombay Town Planning Act of 1915 and the City of Bombay Improvement Trust Act of 1925.
The interpretation of these early laws laid the foundation for the practice of valuation in India. While land acquisition grew apace in the country, the determination of compensation by revenue officials was being challenged. This led to the setting up of the first Consulting Surveyor to the Government of Bombay, AE Mirams, a Fellow of the Surveyors’ Institute of England. It was Mirams who introduced correct principles of valuation of land and buildings with due regard to the interpretation of the term ‘market value’. In addition to the acquisition of lands for public purposes, municipal authorities also started entering into the arena of valuation, now that they could levy taxes.
Banking Industry Concerns
With increasing sophistication of the real estate market in India, the need for valuation systems and practice becomes extremely acute, particularly in this large country of sub-continental proportions. This need becomes even more important in the evolving economy of India which has embarked on the overall policy of liberalisation with foreign direct investments and entry of several players in the market. Concomitantly, the mortgage housing finance market for home ownership has also been maturing in India and this presents its own issues for a standardised system of valuation practice.
The problem is compounded by the fact that while in the earlier days, valuation was done primarily for land acquisition or taxation purposes, the transformation of the property industry in recent times has brought about various other purposes for which valuation is needed, particularly by investors and corporates. All these call for a standardised system of training and evaluating professional competency.
One of the major drivers of the space demand has been the information technology revolution. With the booming of the IT industry, the demand for quality spaces has led to a boom in real estate. Added to this has been the government policy to allow non-resident Indians to invest back home. This has also contributed to the growing demand for high quality spaces, particularly in the residential sector.
To meet the growing challenges, the government also embarked on a policy of bringing about competition in the mortgage lending sector. This led to large-scale lending and home ownership started increasing soon.
All these developments over the last 10 years has fuelled a lot of churn in the real estate industry. While developers, builders, finance companies, material manufacturers etc. have scaled up their operations to match global standards in terms of quality and delivery, the real estate valuation sector has remained by and large orthodox, disorganised and out of date with modern practices and global standards.
Investors, both domestic as well as overseas, need accurate information on the value of the properties in which they propose to invest. Scientific decision making becomes very important particularly when the stakes involved are huge. Inflated and incorrect valuations, particularly in a regime where organised and authenticated databases are conspicuous by their absence, are soon likely to lead to a major crisis in the sector.
Further, the emerging sophistication of real estate finance, the entry of real estate mutual funds (REMFs) demand systematic and accurate valuations of real estate as an asset class. Property portfolio management is emerging as an important area in investment management. The significance of correct valuations cannot be overemphasised. Further, enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) also requires good valuation standards.
The IBA-NHB Initiative
While valuation of immovable properties is very important to conduct the business of banks, as a profession it has several inadequacies when compared with global practices. Hence, in order to assess the situation of the profession in the country and develop a policy, standards and procedures for valuation, the Indian Banks’ Association (IBA) and the National Housing Bank (NHB), have embarked on an initiative with an objective of developing a streamlined regime of valuation in the country. The objective was to take stock of emerging issues facing the housing finance sector and bring about the required reforms.
Based on this, it a ‘Handbook On Policy, Standards And Procedures For Real Estate Valuation By Banks And HFIs In India’ was developed to streamline work across banks and HFIs.
The Unfinished Agenda
It is not to be construed that the Handbook is a panacea for all the ills of the valuation industry. There are many items still on the broader valuation agenda that need to be urgently addressed:
Training and capacity building for valuers to acquire competence.
Lack of an easily accessible sale price database.
Valuation is not recognised as a profession and there is no Valuer’s Act so far.
Need for academic programmes to develop good valuers as against the current scenario where self-styled valuers enter the profession by joining an association.
Both the banking industry and the tax authorities need to be sensitised in global valuation standards
Therefore, in the overall interest of financial security, economic stability, growth and development, the government needs to urgently initiate steps to complete the unfinished agenda of reform in the valuation industry.