We examine whether uniform and standardized valuation metrics for calculating the value of properties, can remove some of the ambiguities in the buying and selling process and make the transaction more transparent Bitter experiences are not uncommon in India’s real estate market, where there is an absence of scientific valuation of the property. Prices tend to differ in the same micro-market, depending upon the project and the builder and even within the same housing society, depending upon the view from the house, floor on which the unit is, the needs of the buyer or seller, and many other considerations.
For example, Rajat Sethi, a local trader in Gurugram, felt that he had negotiated a good deal with his builder until he found out that his neighbor had bought his flat for Rs 4 lakh less. Similarly, Sangeeta Waldron, an NRI, was under the impression that her property agent had secured a great deal for the sale of her flat in Hyderabad until her friends told her that she was short-changed in the deal.
The answer to end this anomaly could lie in uniform and standardized valuation metrics that could be the benchmark of property prices and could be trusted by the buyers and the sellers. Today, the calculation of the market value of the property is a function of demand and supply. There is no scientific method, to determine the ROCE (Return on Capital Employed) of the builder. Similarly, an investor can also at best guess the short-term and long-term trade returns, as well as its rental value. When it comes to the secondary market, it is a game of who is more desperate – the buyer or the seller. Industry experts and economic researchers maintain that real estate valuation, to determine the financial value of property investment, should be methodical and not just based on what price the buyer is ready to pay.
Rohit Garodia, the managing partner of Pecan Reams, believes that real estate valuation metrics could streamline the decision-making process. “Valuation metrics analysis is crucial in real estate investment and its absence can have an impact on the primary and secondary markets. Most property investors fail to identify the significance of market analysis. It forms the base for every calculation and decision-making process that follows. Hence, thoroughly investigating and understanding the market, is crucial to good decision-making,” says Garodia.
Aditya Kedia, managing director of Transcon Developers adds that valuation metrics improve the property buying and selling experience. For a buyer, it gives a better understanding of the property market. Sellers can use this information to explain the importance of the price associated with his/her property, he explains. “Absence of valuation metrics, make it difficult to understand the difference between the valuation of the primary property and the valuation of a secondary property. Hence, the valuation metrics can also help buyers to decide whether to buy the property from the primary market or from the secondary market,” says Kedia.
Aditya Kushwaha, CEO and director, Axis Ecorp, points out that investors calculate their profit through two factors – one is their equity cost and the other is financing cost. For-profit, investors must know how to evaluate the property and how much return it will provide – whether it is through property appreciation, rental income, or both. “With valuation metrics, investors can evaluate a potential investment in minutes and monitor their existing properties. In its absence, investors can get confused regarding the investment in properties and which segment of investment will reap higher returns,” says Kushwaha.
Are standardized property valuation methods in India possible?
However, property valuation is not an easy exercise. Real estate is not as liquid and price-transparent as the stock market, mutual funds, or gold. The price of a given property is, at many times, different from the market value. There will always be instances when the price of the property would be significantly different than the value determined by the valuer, even if the valuer has done the assessment objectively and by applying the right economic tools.
There may be instances when the seller wants to sell the property quickly at a lower price, or the buyer may be particularly interested in a specific object for personal reasons and therefore, willing to pay a price above the value. Nevertheless, as long as the property has been valued by an independent valuer, who is not a related party, the buyer and seller will be making an informed choice.
While property valuation can help in making an informed choice after understanding the intrinsic value of the property and the price one is asking and/or giving, the caveat here is that the valuation must be a strictly regulated profession and accountable to financial institutions. The valuation must be based on methods that comply with valuation standards, market research, and comparable transactions. A certified valuer must be held responsible, in case of any reported conflict of interest.