The amount of foreign capital pouring into US real estate has risen significantly in recent years and is still on the rise. According to Real Capital Analytics (RCA), foreign buyers have purchased some $71.6 billion in US commercial real estate in the past 12 months. And over the past decade, the amount of foreign capital flowing into US real estate has increased from eight percent to 12 percent of all transactions. Clearly, the US continues to be a prime target for foreign capital.
Two different valuation standards currently govern real estate transactions in the US: the Uniform Standards of Professional Appraisal Practice (USPAP), developed by Washington, DC-based The Appraisal Foundation, for deals involving only US entities; and the International Valuation Standards (IVS), created by the London-based International Valuation Standards Council (IVSC), for transactions involving foreign investors.
The presence of two different valuation standards has been a challenge to this cross-border activity, and perhaps has kept the market from growing further and performing as efficiently and effectively as possible. After all, when assessing a US property, many foreign investors want and need to compare real estate apples with apples, not oranges. International investors do not want to have to understand different local practices – they want global consistency, transparency and comparability.
In addition, valuation is inherently subjective. All appraisers will analyze the same data and property differently based on their personal experience and knowledge, so there will always be some element of subjectivity and variation in valuation. Though valuation is based on science, it’s more of an art because of the human factor involved in all transactions.
Currently, we have no way to ensure that the value of a US property being appraised by two different valuation professionals – one using USPAP, the other IVS – will be consistent. And without uniform standards, a foreign appraiser should not perform valuations in the US without a way to bridge his work with USPAP. In theory, two separate valuations performed by a US and foreign appraiser on the same US property should produce similar results. But if a question ever arose about the basis for the valuation, the appraisers would not be on safe regulatory or ethical ground. There should be consistency between USPAP and IVS, even if some differences still exist – but to the extent they do, the appraisers involved should be able to explain and reconcile them.
Some believe that when it comes to valuation standards, one size cannot fit all, so creating a single standard may not be realistic. Therefore, the goal is to create a document that would bridge the different standards and also get different countries to adopt IVS as an internationally accepted standard. The rationale is that if you’re complying with IVS, you should be able to go anywhere in the world and apply that standard, whether in the US, Africa, or elsewhere. With convergence, appraisers and governing bodies in the US and other nations will agree that minimal baseline standards exist and apply. If that happens, appraisers from Asia conducting appraisals in the US can then do so without the risk of being ‘disqualified’ for not being trained in USPAP, by using the bridge document to make the valuation consistent under USPAP and IVS. Currently, The Appraisal Foundation and IVSC are going through the standards, looking for similarities and differences, and seeing where the two groups can and do need to bridge the two standards.
The Appraisal Foundation and IVSC hope to streamline their respective requirements and documents so an appraiser can more easily value a building using both standards at the same time. The two organizations envision having two documents: first, a checklist for a foreign appraiser of what he must do additionally if appraising a property to USPAP standards; and second, a list of additional steps an American appraiser working off IVS would have to take. A preliminary draft of the first should be ready before the end of this year, while the second should be ready by early 2016.
The upshot of this process should be greater transparency and consistency in cross-border valuations involving US property, allowing foreign appraisers to conduct appraisals here without having to engage a US appraiser or risk running into problems. Once the bridging is completed, any appraiser should be able to perform valuations in the US using the bridge document to reconcile differences.
The convergence of valuation standards should help make transactions involving foreign institutions buying US real estate more transparent and consistent. Consequently, the global property market will in turn function more smoothly, with greater certainty and less room for ambiguity.