AsRES AREUEA Joint International Conference 46 July 2002, Seoul, Korea

1、asres/areuea joint international conference4 - 6 july 2002, seoul, koreanecessary changes to valuation practice in china after wto admissionnelson chanproperty groupschool of construction, property and planninguniversity of western sydneylocked bag 1797penrith south dc, nsw 1797, australiacontact: n

2、..auabstractthis paper outlines the necessary changes in valuation practice after chinas admission to the wto. after a 15-years marathon negotiation process, china was formally admitted to the wto in november 2001. the wto membership opens up not only the world market to china but also th

3、e chinese market to the world. investors from all over the world are expected to rush to china to look for investment opportunities, including real estate. as far as real estate investment is concerned, there will be huge demand for valuation services in china.following the introduction of an open d

4、oor policy in late 1970s, china has adopted a land use rights land tenure system based on the hong kong leasehold land tenure system. chinas valuation practice was revitalised when the first land use rights was auctioned in shenzhen in 1987. the chinese valuation practice was developed under the inf

5、luence of socialism and the valuation practice in hong kong. the mix of political ideology and valuation techniques has created a valuation practice with chinese characteristics. the valuation practice with chinese characteristics often causes problems to both domestic and overseas practitioners and

6、 investors. in this paper, the major problems of the current valuation practice are examined and recommendations are made for improvement.introductionafter 15 years of protracted negotiations, china finally obtained the wto membership in november 2001. no doubt both china and other wto member states

7、 will benefit from this breakthrough. investors from all over the world will flock to china in search of business opportunities. in order to meet the obligations of wto membership as well as future challenges and competitions resulting from opening the domestic market, china is required to make a lo

8、t of changes to its existing legal and economic systems. among the changes, there is an urgent need to reform the real estate valuation practices. since the revival of the chinese real estate market in the late 1980s, there has been considerable development in the field of real estate valuation. thr

9、oughout the years, the mix of political ideology and valuation techniques has created a valuation practice with chinese characteristics. these chinese characteristics often turn out to be problems to local and overseas property investors, as well as valuation practitioners. during the authors sabbat

10、ical leave in china in 1994 and 1998, he heard about cases that some overseas investors would rather employ valuers from hong kong to go to china to do valuation for them. while these may be isolated cases, it highlights the seriousness of the problems. given that there are many problems with the ex

11、isting valuation practice in china, it is impossible to cover them in this paper. accordingly this paper only aims at highlighting the major ones and suggests recommendation for improvements.birth of real estate market and valuation industry in modern chinabefore modern china was founded in 1949, th

12、ere was an active property market in china (bi 1994). the property market continued to operate until mid 1950s when the communist government began to take a series of measures to vest all property rights in public ownership (chan & jia 2001). since 1966, private property ownership no longer exists i

13、n china (bi 1994). the salient feature of the land tenure system between 1966 and 1978 was that there was no private land ownership. the state government owned land in city areas and agricultural collectives owned land in the rural areas. land was allocated administratively to government agencies an

14、d state enterprises. the situation remained unchanged until 1978 when china adopted an open door policy to improve the economy and modernise the country. the chinese leaders understood that revival of the real estate market was an important factor to achieve the ambitious objectives. based on the le

15、asehold land tenure system in hong kong, a new land tenure system, known as the land use rights (lurs) system, was introduced (chan 1999). under this system, the state retains the sovereignty of the land, while land users/occupiers have the rights to use the land only. while government agencies and

16、state enterprises continue to get land from administrative allocation, other land users are granted rights to use the land for a period ranging from 30 - 70 years subject to the payment of a lurs assignment premium to the government. on 1 december 1987, the first auction sale of lurs was conducted i

17、n shenzhen special economic development zone (chen & xu 1993). the successful lurs sale formally marked the rebirth of the chinese property market. several years prior to the historical auction sale of lurs, officials had been sent to hong kong to study the land tenure system and operation of proper

18、ty market, and to learn valuation techniques there.ever since the valuation of the reserve price of the first auction sale of lurs in shenzhen, there has been a rapid development in the valuation industry in china. in 1994, the peoples republic of china city real estate administration law was enacte

19、d. section 33 of this law provides for the establishment of a real estate valuation system in the country. on the other hand, s. 58 stipulates the establishment of a system to assess and certify the qualifications of appraisers. during 1993 and 1994, the ministry of construction and ministry of pers

20、onnel together approved and registered 2 batches of appraisers (346 in total) without formal examinations. in 1994, the china institute of real estate appraisers (cirea) was established (china institute of real estate appraisers 1996). commencing from 1995, the only way to get appraiser registration

21、 is through a national valuer qualifying examination under the provisions of the real estate appraisers practising qualification system temporary measures 1995.major problems of existing valuation practicesa) existence of 3 different types of appraisersat present, there are 3 types of appraisers in

22、china (yu & chan 2002). under the chinese lurs system, land and improvements are regarded as two separate entities and are governed by two government authorities. the state land and resources bureau under the ministry of land and resources governs all land uses matters. on the other hand, the real e

23、state administration bureau under the ministry of construction governs all buildings and other improvements on land. since these two government departments operate separately, the vendor and purchaser in a property transaction have to get separate approvals from them before a deal is concluded (chan

24、 1999). regarding valuation, there are two groups of appraisers operating separately under the auspices of these two authorities. on the one hand, there are real estate appraisers working under the auspices of the real estate administration bureau. on the other hand there are land valuers working un

25、der the auspices of the state land and resources bureau. at present, there are about 20,000 real estate appraisers (china institute of real estate appraiser 2002) and about 16,000 land valuers (china real estate valuer association 2002). it is interesting to note that land valuers are recognised onl

26、y by the ministry of land and resources and have not yet been accepted by the ministry of personnel as recognised professionals (ma & li 2001).there is a unique phenomenon in china that the state land and resources bureau inclines to accept valuation done by a land valuer registered with it, while t

27、he real estate administration bureau inclines to accept valuation done by a real estate appraiser registered with it. accordingly, unless an appraiser is registered with both departments, a valuation may have to be done separately by a land valuer and a real estate appraiser. apart from being costly

28、 and time consuming, there may be disputes if a major difference appears between the two valuations. in regard to state owned asset appraisals, the jobs have to be done by recognised asset appraisers. the state owned assets appraisal administration measures 1991 requires the job to be carried out by

29、 state owned asset appraisers registered with the state owned asset administration department under the state council, provincial government, autonomous region government, or government of cities under direct control of the central government. at present there are about 14,000 asset appraisers (chin

30、a appraisal society 2002).given the above requirements, an appraiser needs to get registration from three different registration bodies before he/she can value all kinds of property. it is ridiculous that an appraiser needs 3 licences to do similar jobs. on the other hand, the current appraiser regi

31、stration system also causes confusion among consumers who may have difficulty in choosing the right appraiser for the job. b) lack of acceptable market value definitionlike other countries, market value is very often the basis of property valuation in china. however, there is at present no unified m

32、arket value definition in the country. sections 32 and 33 of the peoples republic of china city real estate administration law 1994 provide that real estate valuation shall be based on the benchmark land prices to be explained in section (f) below., standard land prices the prices of various standar

33、d land parcels in towns (homeprc 2000) and building reinstatement prices promulgated from time to time by the government. in addition, reference shall also be made to the local market prices. however, the law neither defines these valuation bases nor the meaning of market price. in the absence of a

34、statutory definition, there are different market value definitions in different books and documents. for example, it is defined in shenzhen real estate appraisal and management as “the most reasonable price that an interest in real estate may obtain from a sale in the property market on the date of

35、valuation. the market value of a property is not a market value of absolute value but fluctuates within a range of values. regarding the valuation result of a property, it is the most likely value within the range or the median figure in statistical sense” (chen & xu, 1993, p. 459). in real estate a

36、ppraisal theories and methods, it is defined as “the real price reached between the transaction parties. it is a completed fact. this kind of prices regularly varies according to the change of time, the relationship of supply and demand, and attitude, preference and quality of the transaction partie

37、s” (china institute of real estate appraisers, 1996, p. 43). in the code for real estate appraisal, open market value is defined as “the most probable price reached on the open market. when the open market value standard is applied, the required objective reasonable price or value is the open market

38、 value” (china state quality technology monitoring authority and peoples republic of china ministry of construction, 1999, p. 2). it is apparent that the chinese market value definitions are not entirely the same.in march 1993, the international assets valuation standards committee (now the internat

39、ional valuation standards committee) held a meeting in melbourne, australia (denton 1993). at the meeting, the international market value definition was agreed to be “the estimated amount for which an asset should exchange on the date of valuation between a willing seller and a willing buyer in an a

40、rms length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”. this definition is largely based on the previous market value definition in australia (market value meaning ruled by the high court of australia in the case spencer v th

41、e commonwealth of australia (1907), the uk (market value formerly defined by the royal institution of chartered surveyors) and the usa (market value defined in the uniform standards of professional appraisal practice).the following table shows a comparison of the chinese market value definitions wit

42、h the international definition.considerationsivsc definitionchinese definitionsmost probably priceopestimated amountpoasset exchanged on the date of valuationppwilling buyer and willing sellerpoarms length transactionpoafter proper marketingporelationship of supply and demandppparties acted knowledg

43、eably, prudently and without compulsionpoattitude, preference and quality of the partiesop it can be seen that the chinese market value definitions focus on the point that market value is the most probable price the property may reach between the transaction parties. in contrast, the international m

44、arket value definition focuses on estimated amount. the apparent difference is not a big issue as the meaning of most probable price and estimated amount are considered the same (mackmin 1999).other considerations in the chinese market value definitions include relationship between supply and demand

45、, as well as the attitude, preference and quality of the parties. in fact, the said other considerations are part of the considerations of the international definition in the areas of property marketing and parties acted knowledgeably, prudently and without compulsion. however, the chinese definitio

46、n lacks the preciseness covered in the international definition. the chinese definitions also fail to take into consideration that the parties are willing parties and are at an arms length. the willing parties scenario is important because it defines the manner how the final transaction amount is ag

47、reed upon. the at an arms length consideration is important in that it excludes the possibility that the transaction amount may be unduly affected by close relationship between the parties. given the discrepancies, a valuation prepared under the existing chinese market value definitions may not refl

48、ect market value acceptable to the international community. c) government monopoly of market datamarket data is the key factor in any property valuation. in many countries, market data can be obtained via various channels such as real estate agents, local authorities, the land title office, the pres

49、s, and private information providers. regarding private information providers, in addition to raw data, they also supply organised and analysed data to appraisers. for example, in sydney, australia, there are more than ten private market data providers. the more notable ones include cityscope public

50、ations, rp data, residex and cpm research. the sydney cityscope published by cityscope publications is very comprehensive. apart from general property transaction data, it divides commercial properties in sydney cbd in zones. the data supplied include the completion date, land area, number of storey

51、, transaction history, successive owners, transaction prices, and tenancies of individual commercial buildings. on the other hand, the rp data residential property database is very handy. subscribers to the service may link up to the database via the internet. the user can carry out a search for mar

52、ket evidence from the office. after entering the street name and the relevant year, the computer will return residential transactions within 1km radius of the named street.at present, the biggest property valuation problem in china is the difficulty in getting market evidence. there are no private i

53、nformation providers in the country. information from the press, if any, is often incomplete and unreliable. virtually all market data are monopolised by government departments. however, it is very difficult to get relevant information from the relevant government departments. the formerly closed na

54、ture of china still has a strong influence on the release of information. despite the implementation of the open-door policy, there are no clear-cut guidelines as to what information can be disclosed and departments do not know what information can be released. furthermore, records have not been sys

55、tematically kept and information may not be readily retrieved. accordingly public access to real estate information tends to be restricted. in general, information is available to the transaction parties after careful scrutiny of identity (chan 1999). as a result, unless a private appraiser has conn

56、ection with the agencies, it is very difficult to get property transaction data for reference and analysis.d) unconventional units of measurement and ineffective area measurement standardsin general, prices and rents of real estate in china are based on the local currency renminbi (rmb). however, pr

57、ices and rents of quality offices, retail buildings, and up market residential properties are based on us dollar. in addition, there is a strange practice in china that rents of quality commercial properties are commonly quoted and transacted on a daily basis, i.e. at us$/m2/day (yu & chan 2002). de

58、spite the fact that the metric system of measurement is widely used in china, the traditional area unit mu (approx. 667m2) is used for land transaction. thus land prices are quoted and transacted at rmb/mu or us$/mu. regarding the problems of unconventional area measurement, mackmin (1999 p.364) poi

59、nts out that “confusion may occur in interpretation particularly in drafting and interpreting leases and negotiating rents or assessing rental values, the latter being of particular important in assessing open market rental values for the purpose of income capitalisation”. accordingly investors in chin