Mahesh Khalap I Associate Director – Strategic Consulting I Jones Lang LaSalle

The future of RE valuation business in India

A good story to tell (but perhaps not a great analogy)

A USD 100 priced Japanese quartz watch tells time more accurately

and costs lessor than a hand made Swiss Mechanical watch.

The Swiss Watch IndustryA USD 100 priced Japanese quartz watch tells time more accurately and costs lessor than a

hand made Swiss Mechanical watch.

Circa

1876

1st technological

Crisis

Post

WW2

Almost complete

monopoly period

starts

Circa

1970

2nd technological

Crisis

Circa

1982

Start of Swatch

phenomenon

Post 2000

Repositioning of

Swiss made

mechanicals

What is the story of the ‘time telling’ industry?

Are the consumers not more happy today?

Offered a range of products at a range of prices?

Is it not a better macro picture?

How do we see the valuation industry? Whose

perspective?

What is the current RE valuation industry framework?

Are the consumers not more happy today?

Offered a range of products at a range of prices?

Is it not a better macro picture?

No barriers to entry.

However remains lucrative

only to local valuers to

enter now in Tier II cities

Range of values tables

for typical asset classes

(typically resi

apartments) listed by

various portals

Commoditization of services

and drop in fees

Customers do not feel there

is enough data analysis

provided

Data being sold as stand

alone commodity.

Depositories of data with

authority need special

skills for extraction.

Price under cutting is rampant. No

collaboration to share information to

build a robust database.

Objectives of the presentation

Which good things is happening in the

industry at a Global level?

What will happen in India in the next 2 year

period?

Can one make a few personal predictions for

India’s RE asset valuation industry?

Structure of the presentation

• See the industry first from my own worldview (as a

supplier of service)

• Look at the scenario is developed economies along

the framework the 5 Ps of sevice marketing. (and not

look at process or physical evidence)

• Comment on how each of these Ps will evolve in

India over next 2 years.

• Finally make 5 predictions about the valuation

industry in next 2 years for India.

Caveat: All predictions are my personal assessments.

Focused ONLY on the RE asset valuation business.

15 slides

5 slides

Product

Exhaustive and authenticated database Collaborative databases

Product [Developed economy scenario]Highly standardized valuation process driven product with a

significant history (almost 40 years in some developed countries).

Wide spectrum of product avatars – from Web based property

appraisal modules (targeted @ individual home owners) to certified

valuer’s detailed valuation report.

Exhaustive and authenticated database as bedrock for robust

assumptions. For eg NCREIF (National Council for Real Estate

Investment Fiduciaries) database (USA) in 2004 had over 4000

properties to derive its index; in 2012 the number of properties is at

excess of 25,000.

Deep penetration of customized softwares like Argus, Dyna and

Estatemaster.

Standardization

Spectrum of product

Database

Softwares

Key Characteristics

• Product offering linked to requirement of stakeholders depending on the complexity.

• Continuous improvements in place for evolving clients (eg. assessment of uncertainty)

Product [India scenario over next 2 years]Some movement towards standardization seen. To be limited to a

smaller group of valuers.

Significant improvement in offerings and expected over next 2

years. From desktop valuations to detailed appraisal reports are

already being offered.

Select firms and IPC have started offerings that sell data. Thus

there are no plans for collaboration between firms to share this

data on a common platform. Data is still the key differentiator.

Leading firms continue to work on excel based models. Attempts to

bring in use of certain soft wares have not succeeded. Do not

foresee this transition in next 2 years.

Standardization

Spectrum of product

Database

Softwares

Price

Highly standardized pricing structure

Fees charged reflect liability risk exposure

Price [Developed economy scenario]Highly standardized pricing structure for various types of

standardized services (eg. apartment valuation for mortgages). For

atypical and complex valuations the fees are decided on case to

case basis.

The liability taken by the valuers is extensive and the significant

insurance cover needs to be taken to bridge the same. Fees

charged reflect this risk exposure.

Typical single property valuation fees in the range of USD 5000 -

6000

Standardization

Fees as

commensurate to

necessary liability

cover

Key Characteristics

• Limited pool of valuers to compete for atypical and complex valuations. Prices high.

• The liability issue is pertinent given the history of itigations that valuers are party to.

Price [India scenario over next 2 years]No standardization and high level of commoditization of services

as perceived by multiple stakeholders. Going forward there will

significant fee erosion until something drastic happens.

A number of valuers do not fear of potentially being sued and / or

their fees do not reflect that risk. Price differentiation will disappear

unless a few players change their business plan.

Typical single property valuation fees in the range of INR 100,000 to

INR 150,000 (USD 2000 – USD 3000)

Standardization

Fees as

commensurate to

necessary liability

cover

Promotion

.

Strong relationship with global association

Nationally recognized associations

Formal valuation degree level courses

Promotion [Developed economy scenario]The IVSC - The International Valuation Standards Council, is a NGO

member of the UN, with membership major national valuation

professional associations from 41 different countries.

Strong national units including the Appraisal Institute, the American

Society of Appraisers, the RICS, the Practising Valuers Association of

India and the Appraisal Institute of Canada etc.

Often competent authority decides who is can be a valuer. High

entry barriers.

In some countries a formal valuer’s act in place.

Formal education thru leading institutes / universities at degree

level.

Global association

National level

organizations

Role of authority

Formal education

Key Characteristics

• Strong interaction with global association & active national associations.

• Clear role of authority and formal education track in place.

Promotion [India scenario over next 2 years]National association being challenged in its role as national level

organization. In next 2 years RICS will become the preeminent

certification agency.

Wealth Tax act definition removes entities from playing the valuer

role. Do not see that change over next 2 years.

No formal valuer’s act in place and may not be enacted over next 2

years.

There are a few institutes that offer courses but either not leading

institutions or courses are not to a degree level

Associations at

national level

Role of the authority

Education and training

Place

.

Strong relationship with global association

Nationally recognized associations

Formal valuation degree level courses

Place [Developed economy scenario]Dedicated presence of valuers in almost every large city.

Strong connections to the data collection from in-house teams

including broking businesses / capital markets teams. Easy access to

authenticated data thru Govt. sources or thru collaborative

associations.

Some players have offices in multiple countries allowing for

massive knowledge sharing enhancing the offering.

Templates and formats standardized to allow for quick turnover

time.

On ground locations

Data collection

Cross border

knowledge sharing

Tools for quick

turnaround

Key Characteristics

• Defined professionals for valuations with strong support for market data .

• Systems geared to standardization and quick turnaround times.

Place [India scenario over next 2 years]Except for local individual valuers, most professionals in top 8-10

Indian cities. No plans to expand the reach thru permanent anchors.

Limited strengths in certain locations for some players for some asset

classes, rest rely purely on Govt. records. Reach to increase over

next 2 years but not thru collective work.

A small percentage of players have this advantage. No signs of

newer entrants in the fray or market consolidation.

Over next 2 years further emphasis on quick turn around thru

standardization.

On ground locations

Data collection

Cross border

knowledge sharing

Tools for quick

turnaround

People [Developed economy scenario]The depth of the market and the number of years of the industry in

most developed economies imply that there is a large group of

highly experienced valuers who can act as thought leaders.

Valuers come from multiple fields enhancing the knowledge gene

pool.

Almost all stakeholders (including consumers) attend knowledge

enhancement programmes to keep up with the developments in the

field.

Large firms identify and nurture resources to write down internal

process maps which in turn will becomes in-house textbooks.

Reference textbooks and subject focused journals are accepted

means to access the developments.

Level of experience

across typologies,

scale and years

Continuous Training

and retooling

Knowledge

depositories

Key Characteristics

• Large group of highly experienced valuers.

• Continuous training and retooling is acknowledged part of the profession.

People [India scenario over next 2 years]The largest pool of valuers – independent valuers have limited

experience across asset typology, scale or geographical spread.

Over the next 2 years however as consumers demand more value,

the supply side will become driven to gain more experience.

Valuers traditionally came from architecture and civil engineering

background and valuation was ‘secondary focus’. Over the next 2

years, at least in larger firms; MBAs and economists will make the

knowledge pool healthier.

While secondment of regional thought leaders in Indian offices

will not happen; knowledge sharing on the job where the regional

teams offer oversight will increase since the risk perception for larger

jobs will be enhanced.

Over the next 2 years, some firms in India will invest in technology

to reduce cost of training and retooling of their teams.

Level of experience

across typologies,

scale and years

Continuous Training

and retooling

Knowledge

depositories

Personal predictions for Indian market: next 2 years

Personal predictions 01

More value will be offered in the service:

More market research around the particular asset typology for

regular client

For the more evolved client: valuations will start going beyond a single

number opinion of value…

Start providing additional information about the certainty of the Market

value number using Monte Carlo simulations…(soft wares like @ Risk

and crystal Ball can be used)

Indicators like: Skewness, Kurtosis, Certainty Range I for DCF models

Personal predictions 02

Additional component will be demanded in the service:

Lending institutions will demand that development permission related

due diligence be done by the valuers for early stage / vacant land

valuations.

Valuers even in large firms will become more focused on DCR intricacies

in each city. Some parties may not appreciate this development.

Personal predictions 03

Valuers will be made party to litigations and smaller ones may burn out

Be it CLB matters or Arbitrations or judicial court matters some big

valuers will be dragged in the litigations. There is a slim chance that

someone may be made to pay damages but the pain of the legal

wrangle will run deep.

In such risky matters more discretion of fees, risk covers and time of

senior resources will become mandatory for larger firms.

Personal predictions 04

Many large firms will extend mandates of RE asset valuation teams

to include enterprise valuations (for real estate developers) and P&M

valuation.

With RE asset valuation becoming increasingly commoditized, the next

area to harvest will be enterprise valuations (for developers) and P&M

valuations.

Personal predictions 05

If the REIT / REMF does take off in India;

Data collaboration initiative will be taken by the lenders coming

together. Current data providers (like IPCs) will be caught in a bind.

As public markets improve and more RE firms get listed, indices will

becomes important that will need basic property level data. Regulator

may force the hand of lenders to come together.

The end

Mahesh Khalap I Associate Director – Strategic Consulting I Jones Lang LaSalle

The future of RE valuation business in India