VALUATION IN EMERGING MARKETS

Abstract

Methodology of valuation and practice of appraisersí communities in stable economies are well-known. An appearance in the end of last century the countries with developing, emerging market, forces the creation of appraisersí communities in these countries, elaboration and use of new valuation methodology and practice. The practices and methods, which were developed for and reflect the conditions of well-developed market economies, have had to be adapted to economies in transition. In the paper an attempt to aggregate such peculiarities on the base of countries of central and eastern Europe is set forth. The main of the same concerns about valuation in the transitioning economies of other part of Europe and the world. At last, rather recent scandals in the USA with Enron company etc. have shown, among other, that absence of the account of features of an appraisal in situation of emerging market attracts sometimes to a catastrophic consequence. So-called ´White documentª, the comment to International Valuation Standards, devoted to a valuation in the emerging markets, draws attention to necessity of use of the standard of market value and describes difficulties of appraisal activity in these conditions, not giving recommendations on their overcoming. The purpose of the present report are put, is an attempt of more practical approach. Attention is focused now on finalizing professional standards of valuation. These standards, in large part, are modeled on the International Valuation Standards of the International Valuation Standards Committee (IVSC). Other international valuation standards such as European Valuation Standards 2003 developed by the European Group of Valuersí Association (TEGoVA), 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 many countries professional societies practice in accordance with international and have not developed standards of their own. Valuers in these countries need to gain a wide range of appraisal experience and to refine their methodology based on their international experience. Supporting these efforts is membership in international societies such as IRES, 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 valuers. Nevertheless the existing international valuersí organizations are not enough. As a result, a new international association of valuers named ìCounsil of Valuersí Associations of the C.I.S.î has founded with the aim to elaborate a valuation standards for transition economies. Appraisal practices in transitioning economies are usually based on modified versions of three well-known approachesócost, income, and comparative. In urban areas the residual method is used to provide the best estimate of the market value of the land. Establishing the unit of currency to be used in an appraisal is of great importance. Typically in countries under investigation there are effectively different exchange rates for same currency. It is critical, therefore, for a valuer to choose a monetary unit that is adequate to the market of object of a valuation. Economies in transition present some unusual subjects for valuation such as unfinished construction, tenant contributions for improvements due to reconstruction, obligations such as debts, damages, and services. These subjects require special valuation methods. A valuation in conditions of transition economy is made by traditional methodological approaches (by cost, income and comparative ones). We shall discuss features of their realization in concrete methods below, and now we shall note, that by virtue of unreliability of market data the appraisal should be executed by means of a maximum of accessible approaches, generally by all three. The nature of unreliability of data in each of approaches is various, therefore application of all approaches for a valuation of the same objects compensates lacks of each of them. As consequence, arises a problem of the reconciliation of different approaches, practically not mentioned in traditional appraisal textbooks. For this purpose are applied methods which are not changing results of separate approaches (method of weighted average, multicriteria (ìmatrixî) method, expert method, and method on the base of common approach), as well as the method of self-reconciliation (ìbootstrapî), using results of separate approaches in dynamics. 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 10ó15 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 has undergone two modifications (static and dynamic). The first modification is direct capitalization and the second is DCF techniques. Valuers 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. 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 shortóabout 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. Valuation activity in emerging markets has a number of essential features, on some of which we stopped above. Ignoring of it can lead to reception of obviously incorrect results. These features are so important, that it is correctly to reflect them in valuation standards. With this purpose a creation of regional valuation standards is expediently. That we named as features of valuation in emerging markets, can be shown in any country in the separate markets during separate time.

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