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 others, adequate financing of investments. But without sound property valuation practices, it would be difficult to ensure the right flow of credit into the economy and mitigate lending risks.
Appropriately regulated and managed real estate markets are needed to sustain strong economic growth. Keith Lancaster, CEO of Appraisal Institute of Canada, described how strong property valuation fundamentals helped Canada’s economy weather better the global crisis in 2008.
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 accomplished anything at all, that would be in the number of real estate practitioners licensed by the Professional Regulatory Commission (PRC): roughly, the number of licensed valuers at least tripled.
The average quality of valuation service unfortunately took a deep dive. According to one expert estimate,“90% of all appraisal licensure passers actually don’t have any idea how to do the actual 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 have had degree programs in real estate management. To date, I may 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 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 comprise a long period of time. 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 have effectively enforced the quality of the trainings to be conducted in preparation for licensure 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 of experience as 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 effectively 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.
Another departure. The 10-year experience as appraiser/assessor requirement to qualify for the “grandfather clause” was glossed over. That had been rolled into the certification of 60 hours of OJT by a licensed appraiser. So a relatively newly appointed assessor, say, three years on the job, absent 10 years of actual experience in real estate appraisal, could avail of the license without any examination.
The departures defeat the very purpose of RA 9646 which is to professionalize the real estate valuation service, putting to risk the integrity and competency requirement of the profession. It is as one expert said a “race to the bottom.” No wonder, “90%” of the new licensees do not know how to do real estate appraisal.
Does this matter at all? 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 Lancaster. On an individual basis, if one is selling his/her real estate he 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, like for 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 investments and economic growth.
The global valuation community has moved into harmonizing 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.
We are not completely out of the IVS. There are about a few organizations that IVSC recognizes as having adopted the IVS 2017. The Bureau of Local Government Finance of the Department of Finance is one of these, as an Institutional Member. In the private sector, the Institute for Philippine Real Estate Appraisers (IPREA), a Valuation Professional Organization (VPO), is another. Other practitioners, however, are still following valuation standards other than the IVS.
But the public sector needs to do some 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 globalized markets, we need to abide by these standards to stay competitive.
Dec. 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 toto as 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 what they did with IFRS.
Ramon L. Clarete is a professor at the University of the Philippines School of Economics.