The practice of appraisal in transition economies. (International Appraising).
Over the last decade, the European property market began a fundamental shift as the countries of central and eastern Europe started moving toward a market economy. The result has been the internationalizadon of property investment activity and the establishment of a single European market. A discussion of this phenomenon in the Czech Republic can be found in "The Real Estate Valuation Profession in the Czech Republic." (2) Websites for the World Bank and International Monetary Fund provide information on the various aspects of valuation in transition economies.
This article will identify similarities in appraisal practices and methods in the countries of central and eastern Europe. Figure 1 shows a map of the new transitional countries of Europe including Albania, Armenia, Azerbaijan, Belarus, Bulgaria, Czech Republic, Estonia, Georgia, Hungary, Kazakhsran, Kyrgyzstan, Latvia, Lithuania, Moldova, Poland, Romania, Russia, Slovakia, Slovenia, Ukraine, and Uzbekistan. Though the amount of information on these countries differs, the data still reveals notable similarities among these nations.
European countries with transitional economies can be divided into groups based on their adoption of international appraisal procedures. The most advanced countries are Belarus, Bulgaria, Czech Republic, Estonia, Hungary; Latvia, Lithuania, Poland, Romania, Russia, Slovenia, and Ukraine. The intermediate countries are Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Slovakia, and Uzbekistan. The countries where independent appraisal is just beginning because of political factors include Albania, Bosnia, Croatia, Macedonia, Tajikistan, Turkmenistan, and Yugoslavia.
A review of this transition cannot be complete without describing each country's real estate marker; construction features; risk and return characteristics of investment such as national peculiarities on land registration, property ownership and tenure norms; tenant and business risk; growth potential; rate of inflation; fiscal regimes; company law and norms; and local variations from their national economies. This article, however, will concentrate on the state-of-the-art in appraisal communities and the specific appraisal methods used in these countries.
The Beginning of Independent Valuation
Central and eastern European countries moved into a new market era, introducing a wide range of reforms to ensure their transition to a market economy. With this came a variety of problems connected with the process. With no institutions providing independent appraisals, it became necessary, as the property market evolved, to have professionals who understood the market and could perform appraisals according to market principles.
To meet this demand, the financial sectors of these transitioning economies made the creation of an appraisal profession a high priority. The need was especially acute in the field of real estate field, where the banking market was already well developed and used appraisals for loan security since they can use only value estimates that correspond to market values.
Another large sector needing appraisal services is accounting. Because the rate of inflation is 100% or more annually in most countries, fixed assets need to be valued each year. Assigning value to deposits going into statutory reserves is also a need.
Appraising real estate for sale or purchase is not often required. The goals of real estate appraisal are essentially the same in the developed and transitional economies: for the purposes of occupation, investment, development, or redevelopment. It is rare to use appraisal for the stock market or a flotation/merger. Last year countries such as Poland, Russia, Slovenia, and Ukraine attempted to establish valuation for taxation purposes - so-called mass appraisals.
The Creation of Professional Societies
Countries with transitioning economies are headed in much the same direction and face the same problems in trying to establish an appraisal profession. To facilitate this transition, they are forming their own professional societies and working to gain entry into the worldwide community of appraisers. Nearly all countries within recent years have created professional societies and share these common goals:
* Support the activity of the specialists who perform appraisals of all property types;
* Work in cooperation with the state to establish an institute of independent appraisal;
* Represent the professional interests of the society and its members to state, international, and other structures;
* Control the practice of appraisal by developing and maintaining ethical rules for the members of its appraisal societies;
* Consult and provide information and juridical support to the participants of the appraisal market;
* Create juridical and normative documents to regulate appraisal activity; and
* Organize training for appraisers.
Interactions between appraisers and governments are different throughout the various nations. In some countries -- Russia, for example -- the state tends to oversee the practice of appraisal, requiring special permission or a license to offer expert opinions as an appraiser. However, in many countries, such as Kyrgyzstan, professional appraisal societies regulate appraisal activity. In some countries, such as Ukraine, licensing is regulated by a professional appraisal society in cooperation with the state.
Attention is focused now on finalizing professional standards of appraisal. These standards, in large part, are modeled on the International Valuation Standards (3) of the International Valuation Standards Committee (IVSC) and the European Valuation Standards 2000 (EVS 2000) (4) developed by the European Group of Valuers' Association (TEGoVA). The previous version of EVS 2000 was called the European Property Valuation Standards, but the term property has since been dropped. This name change indicates that the same standards are applied not only to the appraisal of property but also to the appraisal of obligations, damages, and services. Other international valuation standards such as those established by the Appraisal Institute, The Appraisal Foundation (Uniform Standards of Professional Appraisal Practice [USPAP]), and the Royal Institute of Chartered Surveyors are less influential in central and eastern Europe. In many countries professional societies practice in accordance with international and European s tandards and have not developed standards of their own. Where they have, those standards typically deal with real estate and intellectual property valuation.
Appraisers in these countries need to gain a wide range of appraisal experience and to refine their methodology based on their international experience. Each country is developing approaches to the appraisal of property that accommodate their own unique legislative and accounting systems and local construction conditions. Supporting these efforts is membership in international societies such as ERES, TEGoVA, and IVSC, which gives appraisers an opportunity to participate in international professional activities and to receive training and information from the worldwide community of appraisers.
Appraisal practices in transitioning economies are usually based on modified versions of three well-known approaches -- cost, income, and comparative. (5)
In urban areas the residual method is used to provide the best estimate of the market value of the land. (Previous Marxist economics used only one method of valuation, which was based on the cost approach.)
Establishing the unit of currency to be used in an appraisal is of great importance. Some countries, such as Belarus, have many different exchange rates for currency. It is critical, therefore, for an appraiser to choose a currency unit that is appropriate to the market of the subject being appraised.
Economies in transition present some unusual subjects for appraisal such as unfinished construction or tenant contributions for improvements due to reconstruction. It is also necessary to appraise obligations such as debts, damages, and services. These subjects require special appraisal methods. Data for these unusual types of appraisals typically is unreliable because of a weak market. This makes it necessary to perform multiple independent appraisals of the same subject using the various valuation approaches listed above.
Notes on the three primary approaches to value in countries with economies in transition:
Cost approach. Data on local construction costs lags behind that of western European and North American countries by 10-15 years. In many cases, construction operations are paid for in cash. In countries of the former USSR, construction indices were not published in the first half of the century so the base costs of construction now used are from 1984 or 1991. In Germany base costs from 1913 are still used.
Income approach. In the countries previously identified as "advanced," based on their adoption of international appraisal procedures, the income approach has undergone two modifications (static and dynamic). The first modification is direct capitalization and the second is DCF techniques. Appraisers usually use both techniques for the initial iteration and for verification of the results. In the direct capitalization of businesses, optimization methods can be used. (6) Inflation and other significant risks make it necessary to use variable rates in the discounting procedure, especially over a long period. Generally, though, the return time for many investments is short--about three to four years.
Comparative approach. The absence of a real market usually gives rise to the use of sophisticated probability procedures and numerous adjustments. High inflation makes it necessary to be extremely diligent in monitoring the market. In response to this need, the BSV Apartment Index, a property index of the Belarusian Society of Valuers, is produced weekly. (7)
Economies in transition present such unique challenges at this time that even worldwide appraisal companies cannot perform appraisals in these regions using traditional methodologies.
(1.) N. Trifonov, "Valuation in Economies in Transition," 17th ARES Annual Meeting (Coeure d'Alene, 2001).
(2.) J. Ryska, F. Drozen and P. Ryska, "The Real Estate Valuation Profession in the Czech Republic," The Appraisal Journal (October 1999): 345-353.
(3.) International Valuation Standards Committee, International Valuation Standards 2000.
(4.) The European Group of Valuers' Association, European Valuation Standards 2000.
(5.) The Appraisal of Real Estate, 11th ed.: 335-578.
(6.) N. Trifonov and N. Sinlak, "Optimization Methods in Business Appraisals by Income Approach," Property Management (5, 2001): 5-8.
(7.) N. Trifonov, "Experience of Weekly Property Indices in Belarus," Eight European Real Estate Society Conference Book of Abstracts (Alicante: Instituto de Economia International, 2001): 166-167.
Nikolai Trifonov, PhD, is the head of the valuation department in Belarusian State University and the president to the Belarusian Society of Valuers. He is also the chairmen of the Coordination Council for Valuation in C.I.S. as well as the director at large responsible for Central and Eastern Europe Relations in the European Real Estate Society. He is honorary member of Portuguese Association of Valuers of Fixed Assets, AAPOR, Association of Kyrgyzian Appraisers, OKO, and Eastern European Union of Experts in Germany, OSV. Contact: +375 29 6776776; email: firstname.lastname@example.org.
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|Date:||Apr 1, 2002|
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