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Property Valuations – A key foundation to a sustainable economy

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As the Mongolian economic situation gets progressively worse, politicians, analysts and commentators increasingly focus on the perceived “solutions” of the crisis in the form of signing the PF for OT, completing the bid process of TT and resolving the impasse of the 106 mining licenses. While the resolution of those impasses will no doubt boost the economy, assist in restoring foreign investor confidence and remove considerable fiscal pressure from the Government, it is our belief that those are short-term superficial fixes that do not address the fundamental issues of governance, transparency and weak institutions.

In order to build a sustainable economy built on long-term steady growth and strong institutions it is essential to firm up the foundations of the economy before a fragile edifice of epic proportion is built upon it. Failing that, Mongolia would only be building yet another “house of cards” that is destined to collapse once again and throw Mongolia into increasingly short economic cycles of extraordinary booms followed by economic downfalls.

Building strong foundations requires the adherence to various international standards and practices, when it comes to the real estate sector, it is very important to adopt and apply international property valuation standards if the sector is to mature.
Adopting International Property Valuation standards is essential since Real Estate plays such an important role in the Mongolian economy, it is today the biggest contributor to GDP growth (above mining) and is the foundation for many of the country’s financial products. Real Estate is used as collateral by banks, it is the primary store of wealth for most Mongolians, it is a considerable source of revenue for the Government and the Municipality and it supports countless industries. Finally, shelter is a basic human need, it is an aspirational product for all and, importantly, it is essential for future social stability and growth. Not knowing the accurate value of a real estate asset not only impacts all of the above negatively but it also leads to market inefficiencies and a high cost of financing.

Carrying out reliable and accepted property valuations is essential but difficult to do since each property is unique and transactions are infrequent, it is never the less essential that it be carried well since it is the foundation of much of our financial system. The Global Financial Crisis of 2008 proved this very clearly. Valuations are required by financial institutions, insurance companies, construction companies, developers, tax departments, listed companies, mining companies, investors and individual home owners or tenants.

Valuations are usually carried out to obtain the “Market Value” of a property but can also be focused on “worth” or “investment” value depending on the need and requirement of a client. It is important to distinguish that those value can differ greatly and must be understood as such.  For reference, market value is defined as:

“The estimated amount for which an asset of liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”

(RICS, Red Book, 2014)

Since producing reliable real estate valuations is so important, how do we insure that there is a single standard and set of methodologies? For real estate valuations to be worthwhile they have to be understood and accepted globally. This is where the IVSC (International Valuation Standards Council) steps in. The IVSC is a non-profit institute based in London which sets the standards and approaches to valuation globally. This is then taken up by the RICS (Royal Institution of Chartered Surveyors) who set the methodology and the practice of the valuation industry. Each country then has its own institute of valuers that accredits local valuers according to the IVSC standards and RICS methodologies.

The key to this system is that it leads to a situation where for example, an insurance company can insure the global property assets of Rio Tinto, where a bank in Paris can finance the construction of offices in Cape Town or where an investor in NYC can purchase property in Ulaanbaatar as he understands and trusts a valuation done by a RICS Chartered Valuer in Mongolia. If Mongolia wants to become an attractive destination for long-term investors, it must abide by, amongst others, international valuation standards.
In actual fact, on the surface it seems that this is the case. The Mongolian Institute of Appraisers nominally follows the IVSC standards but this is far from a reflection of the reality, this is due to a number of factors. First and foremost, the Ulaanbaatar property market is a relatively small and illiquid market with little comparable data and no access to public domain, it is rife with conflicts of interest, untrustworthy statistics, poor enforcement of regulations and a lack of skilled practitioners.

For this situation to be completely remedied, would require a considerable change in the regulations surrounding the market, a long term endeavour, but there are steps that can be taken to improve the situation in the shorter term. I believe that a fundamental move would be to not only formally recognise the profession through improved licensing but to encourage universities to present postgraduate courses in the built environment, those are severely lacking today, which is surprising since real estate is arguably the second largest sector of the Mongolian economy. There has to be stronger public policies to regulate conflicts of interest and corruption, and those need to be strictly enforced. This includes forcing financial institutions and institutional bodies to use external valuers who have no material link with their clients.

Finally, valuers, their clients and policy makers need to be given the right information and tools, the most important element of this is to carry out a comprehensive translation of the RICS red book (already translated in over 25 languages) and possibly most important of all is the establishment of a true public domain system in Mongolia.

Public Domain is the act by which certain information on real estate transactions are released in a freely searchable form by any member of the public by the Municipality of a city. This would then become an invaluable tool for valuers to research the market but more importantly would indicate liquidity, transaction amount, allow the city to fairly set taxes, inform the public, reduce the severity of economic cycles and finally reduce corruption by public officials.

As the failure to build sustainable institutions shows, adopting international standards for property valuation may be politically unglamorous, but it is an essential tool in strengthening and reforming the institutions of the country, building long term legitimacy with market actors and attracting the good kind of foreign investment. It is essential that alongside the headline grabbing news of signing OT and TT, the new Prime Minister of Mongolia also focuses on the nitty gritty of building an attractive and sustainable economy.

SOURCE: M.A.D. Investment Solutions




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