THE SITUATION, PROBLEMS AND COUNTERMEASURES OF CHINA S REAL ESTATE APPRAISAL INDUSTRY -A CASE STUDY OF TANGSHAN

 
Royal Institute of Technology, Stockholm, Sweden
                                Department of Real Estate and Construction Management
                                Division of Building and Real Estate Economics.

Master Thesis Number: 341

 THE SITUATION, PROBLEMS AND COUNTERMEASURES OF

          CHINA´S REAL ESTATE APPRAISAL INDUSTRY

                    —A CASE STUDY OF TANGSHAN

_______________________________________________________________________________

Author: Qiang Zhang                                         Supervisor: Hans Lind

                                     Stockholm 2006

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Acknowledgement

Firstly, I am thankful to my supervisor Hans Lind for his support and guidance during
the period of my thesis.

I would also like to thank to Professor Erik Persson for his kindly help about the
information of Sweden.

I am very thankful for my Chinese supervisor Jiefang Tian who gave me great help
from the beginning of selecting the theme, interviews with Chinese companies and the
final suggestions of the thesis.

For the interviews with real estate appraisal companies, I am grateful for the help of
Guangming Yang who helped me to connect with appraisal companies. And I
appreciate the principals of real estate appraisal companies of Tangshan for providing
their information of the firms and giving the frank thoughts.

I would like to thank to all my friends in Sweden and in China, accompanying me
during this process.

Finally, I am very thankful to my family, especially my mother. Thank you for your
supporting and encouragement all the time. You are my biggest impetus. I appreciate
everything you did for me in my growing way. And I never forget my grandpa’s
words. I dedicate this thesis to my grandpa and my mother.

Stockholm 2006-05-27
Qiang Zhang

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Master of Science Thesis
Title                        The Situation, Problems and Countermeasures of China
                             Real Estate Appraisal Industry--A Case Study of
                             Tangshan

Author                         Qiang Zhang

Department                     Dept. of Real Estate and Construction Management,
                              Division of Building and Real Estate Economics
                              Royal Institute of Technology

Master Thesis Number              341

Supervisor                      Professor Hans Lind

Key words                      Real estate appraisal, Problems, Suggestions

Abstract

With the booming of the real estate industry of China, the correlative industries have been
expanding including the real estate appraisal industry. Because real estate appraisal is involved in
real estate purchase, mortgage loan, stock listing, enterprise incorporation and taxation etc, it plays
an important role in a market economy. Inaccurate appraisal of the property’s value might result in
financial crisis. Therefore, the development of real estate appraisal industry will affect the growth
of the whole national economy. However, because of the short history and immature market
environment, China’s real estate consultation industry’s development has been restricted.
Especially, in recent years, lots of international outstanding companies entered the China’s real
estate market and relevant fields, which brought challenges to Chinese companies. How to
guarantee that the real estate appraisal industry of China is developing regularly and maturely as
early as possible is very significant for us and for foreigner investors. This thesis used the case
study to research the current situation of real estate appraisal industry of China and found out the
problems blocking the improvement of this field.

The author investigated the real estate appraisal industry of one typical city of China to know the
situation and the existing problems of this field in the whole country. Through interviews, the
situation of real estate appraisal companies has been presented and many problems, which blocked
the development of this industry, have been exposed, such as low professional quality of
appraisers, monopolization problem, professional ethic problem and imperfect laws and codes etc.
To solve these problems, the author used the successful experiences of Sweden and USA as
references and then attempted to put forward some suggestions concerning the real estate
appraiser system, construction of laws and codes, professional body’s function and establishment
of information system.

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TABLE OF CONTENTS
ACKNOWLEDGEMENT .....................................................................................................................2

ABSTRACT ............................................................................................................................................3

1. INTRODUCTION ..............................................................................................................................6

   1.1 BACKGROUND AND PURPOSE...........................................................................................................6
   1.2 STATEMENT OF THE PROBLEM .........................................................................................................6
   1.3 METHOD .........................................................................................................................................7
   1.4 LIMITATION .....................................................................................................................................7
   1.5 STRUCTURE .....................................................................................................................................8

2. THE GENERAL SITUATION OF THE REAL ESTATE APPRAISAL INDUSTRY IN CHINA
..................................................................................................................................................................9

   2.1 THE COURSE OF REAL ESTATE APPRAISAL INDUSTRY DEVELOPMENT ...............................................9
   2.2 THE SYSTEM OF REAL ESTATE’S RIGHTS AND INTERESTS................................................................10
   2.3 THE MANAGEMENT OF REAL ESTATE APPRAISAL INDUSTRY ...........................................................10
   2.4 APPRAISAL APPROACHES .............................................................................................................. 11

3. CASE STUDY...................................................................................................................................13

   3.1 INTRODUCTION OF TANGSHAN ......................................................................................................13
   3.2 COLLECTED DATA FROM INTERVIEWS ............................................................................................13
       3.2.1 Appraisers of Tangshan.........................................................................................................13
       3.2.2 Achievements of appraisal companies in 2004......................................................................15
       3.2.3 The percentage of appraisal projects of different appraisal purposes (in 2004 and in 2005)
        .......................................................................................................................................................16
       3.2.4 Share of appraisal projects of different appraisal purposes..................................................18
   3.3 ANALYSIS AND CONCLUSIONS ARRIVED .........................................................................................18
       3.3.1 Low Professional quality of appraisers.................................................................................18
       3.3.2 Lack of qualification’s classification management................................................................19
       3.3.3 Monopolization existing in appraisal industry......................................................................20
       3.3.4 Professional ethics problem ..................................................................................................21
       3.3.5 The confusion induced by multi-administration’s intercross management............................22
       3.3.6 Imperfection of law and code system ....................................................................................22
       3.3.7 The problem of industry’s supervision and administration....................................................23
       3.3.8 Unestablished appraisal information system ........................................................................23
       3.3.9 China Institute of Real Estate Appraisers and Agents’ Function ..........................................24
       3.3.10 About the risk-evading problem ..........................................................................................25

4. PROFESSIONAL BODIES AND INFORMATION SYSTEM IN SWEDEN AND USA ..........26

   4.1 PROFESSIONAL BODY’S POWERFUL STATUS ...................................................................................26
       4.1.1 Sweden ..................................................................................................................................26
       4.1.2 USA .......................................................................................................................................27
            4.1.2.1 Introduction of Appraisal Institute.................................................................................................. 27
            4.1.2.2 Membership designation ................................................................................................................ 27

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4.1.2.3 The objects and bylaws of Appraisal Institute ................................................................................ 28
           4.1.2.4 Powerful supervision system.......................................................................................................... 29
   4.2 CLASSIFIED APPRAISER SYSTEM ....................................................................................................30
   4.3 GOOD INFORMATION SYSTEM ........................................................................................................30

5. QUALITY OF APPRAISAL REPORT ..........................................................................................32

   5.1 APPRAISAL REPORT OF CHINA .......................................................................................................32
   5.2 AMERICAN APPRAISAL REPORT ......................................................................................................33
   5.3 COMPARISON IN SALES COMPARISON APPROACH ...........................................................................34
   5.4 COMPARISON IN COST APPROACH ..................................................................................................34
   5.5 COMPARISON IN INCOME APPROACH ..............................................................................................35

6. SUGGESTIONS ...............................................................................................................................38

   6.1 APPRAISERS’ SELECTION AND CLASSIFICATION MANAGEMENT ......................................................38
   6.2 CONSTRUCTING CORRESPONDING LAWS AND CODES .....................................................................38
   6.3 THE FUNCTION’S MATURITY OF REAL ESTATE APPRAISAL PROFESSIONAL BODY .............................39
       6.3.1 Constructing Ethic Monitor System ......................................................................................39
       6.3.2 Protect the benefits of members ............................................................................................40
           6.3.2.1 Appraisal independent action center to help appraiser combat with client pressure ....................... 40
           6.3.2.2 Continued education and retraining................................................................................................ 41
           6.3.2.3 Providing information resources and various professional supports .............................................. 42
   6.4 IMPROVING THE INFORMATION SYSTEM.........................................................................................42

7. CONCLUSION.................................................................................................................................44

REFERENCES .....................................................................................................................................45

APPENDICES ......................................................................................................................................47

   APPENDIX 1 QUESTIONNAIRES ............................................................................................................47
   APPENDIX2. ABOUT PROCEDURAL SYSTEM FOR THE ENFORCEMENT OF THE CODE OF PROFESSIONAL
   ETHICS AND STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE ....................................................48
   APPENDIX3. THE PATTERN OF REAL ESTATE APPRAISAL RESULT REPORT ...........................................49

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1. Introduction

1.1 Background and purpose

Real estate appraisal plays an increasingly important role in real estate activities, such as the
purchase of real estate, mortgage loan, reform of shared company, stock listing, enterprise
incorporation, segmentation of real estate, legal arbitration, taxation etc. Therefore, real estate
appraisal is an indispensable service in a market economy. It is of great importance to all the
parties of real estate equity and even the economy as a whole. If the value of property cannot be
appraised properly, financial risk will be caused, such as the financial crisis of Thailand in 1997.
“The Bangkok Bank of Commerce collapsed under the weight of property loans, exposing
weaknesses in other banks in Thailand.” (Gilbertson Barry and Preston Duncan, 2005, pp. 123 –
140) Soon the financial crisis in Thailand dragged down the stock exchange in other south-east
countries: Malaysia, Indonesia and Philippines, because the world economies become closer by
globalization. Therefore, real estate appraisal does matter in the economy development in any
country.

From the above mentioned, we can see the importance of real estate appraisal, especially in China,
the result of which after being confirmed by the departments concerned will serve as an evidence
for enterprises to invest and buy shares or to ask for mortgage loans. With the entrance into WTO
in 2001, a lot of famous international companies have established branches in China, which has
brought lots of valuable conceptions, driving the development of real estate to internationalize the
appraisal field. However, owing to the short history of the real estate appraisal industry and its
being immature in our country compared with that of the developed countries, the entry of
internationally outstandingly enterprises will inevitably bring challenges to our appraisal industry.
Therefore, it is very necessary to know the current situation in the field of real estate appraisal and
existing problems which restrict this industry’s development. How to draw on other countries
‘excellent experiences for reference to reduce the gap between ours and that of the developed
countries is a must for us to consider, for its proper and healthy development will influence the
development of our national economy on the whole.

1.2 Statement of the problem

Real estate appraisal belongs to the real estate consultative industry. With the booming of real
estate industry in recent years in China, the appraisal industry has been driven and developing at a
high speed. However, because of the lack of the relevant laws and regulations and other factors, it
is rather difficult for the real estate appraisal industry to function properly and normally. Resorting
to exemplification, this thesis will study the development and situation of this industry in depth to
find out the problems which restrict its improvement. And then with those problems in mind, I will
try to find the proper model to be drawn on for its development with reference to the advanced
experiences in Sweden and USA. The problems with regard to the appraisal industry in one city

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will show a general picture of all the industry, so I will choose one city to carry out the research
into real estate appraisal as one example to know its current situation in general, from which we
will come to a general picture of the Chinese appraisal industry. Finally, with reference to the
advanced experiences in such countries as Sweden and USA in the aspects of professional body’s
role, appraiser’s selection, information system and appraisal approaches etc, some suggestions on
how to solve the existing problems will be put forward.

1.3 Method

This thesis adopts the case study methodology. By studying the problems existing in appraisal
industry in one city of China, I try to get the profile of common problems in the whole industry.
The city of Tangshan, my hometown, will be the subject in my case study. I interviewed most
appraisal companies’ principals there. The questionnaire (appendix1) was made before the
interview. But the interviews were two-way conversations. And the result has been obtained by
recording the answers through the interview at the same time. The data about the companies in
Tangshan has been collected through the interviews with the principals of real estate appraisal
companies. For the appraisers’ background, every company’s total appraisal value and relevant
regulations and policies, I interviewed the Tangshan Bureau of Housing Management.

I also reviewed lots of the research literatures and articles from real estate journals and appraisal
books. These literatures contain information about current situation of real estate appraisal
industry of China and tendency and the appraisal techniques of Europe and America etc. There is
still a lot of information about the policies and professional body which is obtained from websites.
Concerning appraisal reports, I got some from two companies of Tangshan as the samples used to
analyze the appraisal technique. For the part of appraisal industry of Sweden, I consulted with
Professor Erik Persson.

1.4 Limitation

Because this thesis adopts case study to investigate the situation of real estate valuation in a city of
China, some aspects, such as the extent to which the development shows differences in different
cities. For example, the industry in Beijing, Shanghai or other big cities develops more quickly
and regularly than other cities and the management is correspondingly stricter. The companies’
scale in these big cities is larger and the numbers is much higher than in ordinary cities. In those
cities which are smaller than Tangshan, the appraisal industry’s development may on the opposite
as lagging. However large or small, developed or developing the city is, the problems existing in
this industry are likely to be the same.

About the comparison of income approach between China and USA, due to lack of appraisal
reports using this approach, it is difficult to compare the differences in practice.

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1.5 Structure

The second chapter briefly introduces the situation of the real estate appraisal industry in China
such as the development history, current management, special property’s right and interests
compared with western countries and appraisal approaches of China.

The third chapter is the case study. The collected data has been showed first and then the analysis
from the data and some problems reflected through interviews have been discussed. Through
understanding some problems existing in this industry, the situation of this industry in China can
be obtained.

Chapter four is the introductions of professional bodies and good information system of Sweden
and USA. These contents will be used as references to put forward some suggestions on aspect of
practice for China’s real estate appraisal industry.

Chapter five compares the quality of appraisal reports between China and USA. Through
analyzing the appraisal reports, the gap of appraisal technique has been discovered.

The chapter six puts forward suggestions to solve these problems which restricted the
development in this field from four aspects by using good experiences of Sweden and USA.

Finally, chapter seven concludes the problems existing in real estate appraisal industry discovered
by interviews and gives some advices for this field’s development.

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2. The general situation of the real estate appraisal industry in

China

2.1 The course of real estate appraisal industry development

The real estate appraisal industry date from the end of 1980’s and was related to the reformation of
land use system and housing commodity. It developed quickly in the recent 10 years by getting
support from the government and attention of society. The important steps are as followed:
1. In 1989, the Asset Appraisal Center of China was established under the authorization of the
    Ministry of Personnel.
2. In 1991, the State Council published “the Appraisal Management Regulation of State Asset”
    (No. 91 Regulation).
3. In December, 1992, the Asset Appraisal Association of China was set up.
4. On July 5th, 1994, the No.33 regulation of “The City Real Estate Management Regulation of
    the People’s Republic of China” stipulated the state implements the real estate price appraisal
    system.
5. On September 12th, 1994, China Real Estate Appraisers has been established as the
    professional body in the whole country.
6. In 1995, “Real estate appraisers’ License Regulation (temporary)” was published.
7. With reference to other countries’ updated research outcome about real estate appraisal and in
    combination with theory and practice, as reference, the real estate appraisal theory and
    method was set up and developed. The Ministry of Construction drafted and published the
    State Real Estate Appraisal standard with other relevant Ministries based on the theoretical
    research and practical experience in our country. On February 12th, 1999, The Real Estate
    Appraisal Code was published and put into effect in June 1999, which meant it was the first
    time to establish the uniform standard in the whole country.
8. Before 2000, almost all the real estate appraisal institutions were state-owned units or
    economy entities affiliated with some government organs. They in fact are the extension of
    government bodies, monopolizing the real estate appraisal industry and as a result placing an
    obstacle to the proper development of its market and improvement of evaluation. In June,
    2000, the State Council requested the reformation and disconnection of social agency, which
    meant those appraisal institutes must be separate form the government and become an
    independent entity. Until the end of 2001, the reform work was basically done. The former
    appraisal institutes have been reformed to become limited liability companies or partnerships
    invested by individually licensed real estate appraisers. The appraisal companies suitable for
    modern company system have been set up after this reform.
9. In October, 2004, the Ministry of Construction enacted No.135 code(《The Conditions for 15
    Regulations to Come into Effect under the authorization of the State Council》), which
    stipulated new regulations of the authorized qualification of real estate appraisal agency.
    Under this order, all real estate appraisal agencies should be reclassified to be given a grade

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according to the newly published regulation. It integrated the disordered appraisal market,
    promoted the mobility of the professionals and strengthened the competition of enterprises.
10. In September 2005, the Real Estate Appraisal Institute’s Management Measures was issued
    and implemented on December 1st, 2005. The content of the statutes includes how to manage
    the appraisal institutes, the conditions of authorized qualification and corresponding
    punishment measures. This statute ordained the further conditions for the appraisal institute’s
    different grade qualification and improved the entrance requisitions for this industry. The
    irregular companies or uncompetitive companies have been eliminated. For the part of law
    responsibility and measures of management, corresponding items have been put forward to
    punish the behaviors when some item is violated. The benefit of these is changing the
    situation as there was no explicit law to implement before. And now the government is able to
    manage the appraisal industry by depending on executive law. In a word, the issued statute
    complements the space of industry management and neatens this industry.

2.2 The system of real estate’s rights and interests

   This is mainly composed of three kinds of interests:
  a. The ownership- it mainly means the land ownership and building ownership. In China
      there are two kinds of land ownerships: State Land Ownership and labor collectivity land
      ownership. The law stipulates that the lands of city belong to the State. The lands of
      country and city suburb which is not belonging to the State belong to the Collectivity. The
      organization and the individual can take the building ownership.
  b. The usufruct includes the building usufruct and land usufruct. The land usufruct is often
      looked as the important intangible asset scored on the asset accounts of company. The
      usufruct is often connected with the usufruct limit.
  c. Other rights and interests includes the transferring right, lease right and hypothec etc.
      Today China implements the policy of “building ownership transferred with land”. The
      transferring, lease and hypothecate of land usufruct including transfer of building and
      other attachments’ interests. In contrast, the transfer of building ownership in general
      includes transfer of occupied land usufruct. Therefore, the principal part of real estate
      ownership will be clearly stated when appraised.

2.3 The management of real estate appraisal industry

In China, real estate appraisal institutes are managed for different grades. The Construction
Administration Department of State department is responsible for management of all cities’ real
estate appraisal. The Real Estate Administration department of the local government which level is
higher than county, is responsible for management of real estate price appraisal in their own
district. On the level of province, there is no real estate management bureau alone. On the level of
city and county, there is independent real estate management department. The management work
of State level and Province level prefers macro-management, such as establishing the appraisal
code and policies. The work of city and county level stresses on the detailed management.

In August 1994, China Institute of Real Estate Appraiser and Agents (CIREA) has been set up. Its

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main task is studying the real estate appraisal theory and approaches; training for appraisers;
assisting government for registration of appraiser qualification; drafting standard and code of
industry; communication of international academy etc. This institute is searching for a suitable
way to manage appraisers by learning other countries’ successful experiences. From 1995, the
appraiser exam is held every two year in the whole country. There are almost 30,000 appraisers
now. But the number of appraisers is still not enough compared to the whole appraisal market. The
assessors who are trained by local administration department become supplement due to lack of
appraisers. At present, the work on the aspects of continued education and trainee is not good
enough. The function of local government and industry institute should be enhanced. The
professional quality of appraisers should be improved through retraining.

The standard of appraisal charge fee should conform to the standard of Price Department, which is
decided by value of the bid. But it ignores difficulties of appraisal project and other appraisal
reasons. Therefore, this standard is a little bit too simple.

2.4 Appraisal Approaches

The real estate appraisal approaches include sales comparison approach, cost approach, income
approach, hypothetical development method and land datum value method etc. Among them, the
sales comparison approach, cost approach and income approach are the most basic approaches.
Every appraisal approach is applied to special subject and condition. Sometimes, for a property,
two or more approaches can be applied to get the market value. These approaches are used in the
same time to verify the result and supplement for each other. In China, the Real Estate Appraisal
Code requires that appraisers should take two or more approaches to appraisal the value of one
property. The introduction of three basic approaches is shown as followed:

ⅰSales Comparison Approach
This approach is selecting similar properties which were traded around the value date with the
subject property and comparing similar ones with appraised property in some aspects. Through
revising the values of similar properties, the subject’s market value will be obtained. The detailed
steps are as followed:
  a. Searching traded properties b. selecting the comparable properties c. establishing the
     comparable basics d. revision for trading conditions e. revision for trading date f. revision
     for area factor g. revision for individual factor h. getting the final value.

ⅱIncome Approach
 Estimating the normal effective income of future for the subject property and selecting the
 proper capitalization rate to discount at the value date and accumulate, the indication of value
 will be obtained. The steps are as followed:
 a. Searching relevant information about income and operation fees.
 b. Estimating the potential gross income
 c. Estimating the effective gross income
 d. Estimating operation fees
 e. Estimating net operating income

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f.   Selecting the proper capitalization rate
  g. Selecting proper formulation to get the market value

ⅲ Cost Approach
 This approach is to use the replacement price or rebuilding price for the subject property at the
 value date less than depreciation to get the value of property. The steps are as followed:
 a. Searching information about relevant cost, tax fee and exploration profit
 b. Estimating the replacement price or rebuilding price
 c. Estimating depreciation
 d. Getting the result

  The replacement price or rebuilding price should be composed of cost fees of re-exploring or
  rebuilding the new property as the subject property, payment of tax and exploration return. It
  includes the following items:
  a. Land fees
  b. Exploration cost
  c. Management fees
  d. Investment interest
  e. Sales tax fees
Exploration return

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3. Case Study

3.1 Introduction of Tangshan

For understanding the real estate appraisal industry’s situation and problems which restrict
industry’s development in depth, I select case study method and hope to analyze the whole real
estate appraisal industry’s situation in China by researching one city’s industry. In research, the
problems which are existed in Tangshan’s industry reflect the common problems of the whole
industry in China, which become the obstacles to block this industry’s development.

Tangshan is a heavy-industry city along sea with hundred-year history. It lies in the center area
around Bohai Bay. Located south upon Bohai, north upon Yan Mountain, east upon Qin Huangdao,
west upon Beijing and Tianjin, it is an important place to connect North-East area and North
China area. Tangshan administers two cities, six counties, six districts and two state farms, which
area is about 13500 square kilometers with a population of 7.10 million. The city area is about
3900 square kilometers with a city population of 2.96 million. Tangshan is a big city in China. The
advantage in location and many industries’ development drove Tangshan’s economic booming,
such as coal mine industry, steel industry, china industry and engine industry etc. Tangshan’s
economic development lies at the top in Hebei Province. In the whole country, Tangshan belongs
to a “new” city with fast development, because this city has been reestablished from 1976 due to a
big earthquake. And its economic level lies in the middle of whole country with upward activity.
Tanshan is a typical city in China. Taking it for example, we can find out the common situation in
real estate appraisal industry in China. And it is also representative for China real estate appraisal
industry in upward development.

There are total nine real estate appraisal companies in Tangshan after reformation and
disconnection. All of these companies are only dealing with the real estate appraisal operations.
This condition may be resulted from short time for development of real estate appraisal industry
and the small scale of appraisal companies. In Europe and America, there are lots of big
international consultation companies, such as DTZ, CBRE and JLL etc. These companies’
operation involve transactional business advises and advisory services such as the management of
real estate portfolios, building consultancy, and valuation as well as capital advice etc.

3.2 Collected data from interviews

3.2.1 Appraisers of Tangshan

There are nine real estate appraisal companies in Tangshan. They are “Tanshan Chengxin Real
Estate Appraisal Ltd”, “Tangshan Huaxin Real Estate Appraisal Ltd”, “Tangshan Lande Real
Estate Appraisal Ltd”, “Tangshan Hongda Real Estate Appraisal Ltd”, “Tangshan Hengxin Real

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Estate Appraisal Ltd”, “Fengrun District Xinrun Real Estate Appraisal Ltd”, “Luan County
Shenzheng Real Estate Appraisal Office”, “Luannan County Chengxin Real Estate Appraisal Ltd”,
“Zunhua Hengxin Real Estate Appraisal Ltd”. For simplifying the companies’ name, I use the
following codes in turn “ TCX”, “THUX”, “TLD”, “THD”, “THEX”, “FXR”, “LSZ”,”LCX”,
“ZHX”.

Table 3.1 The number of appraisers in every company and each company’s background
Company       Number of registered     Qualification   Registration Capital   Total Asset
Name          real estate appraisers   Grade           (10 thousand Yuan)     (10 thousand Yuan)
   THD                   3                   3                  50                    670
  THEX                   3                   3                  50                     53
   TLD                   6                   3                 100                    1627
  THUX                   6                   3                  50                     65
   TCX                   8                   3                 100                    670
   ZHX                   3                   3                  50                     56
   FXR                   3                   3                  50                     66
   LCX                   3                   3                  50                     55
   LSZ                   3                   3                  50                     62

Table 3.1 shows the appraisers’ number and some basic introduction of about the real estate
appraisal companies in Tangshan. According to the No.135 Statute “About Fifteen Administration
Admission’s Condition’s Regulation Decided by State Department” issued by Construction
Department in October 2004, the real estate appraisal company’s qualification requirement has
been higher than before. In this regulation, different requirements aiming at different
qualifications have been put forward in detail. According to the new statute, the real estate
appraisal companies have been reformed and integrated. Before No.135 Statute, there were twelve
real estate appraisal companies in Tangshan and the qualification grades were different from grade
two to grade four. (There are four grades in qualification in old regulation.) The numbers of
professional registered real estate appraisers were between one and seven. The registration capital
was between 100 thousand and 800 thousand. Because the auditing requirements of qualification
were low in the past time, many irregular companies entered the appraisal market, resulting in
confusion in market and low quality of appraisal report. The new statute amended the
requirements on the aspects of registration capital, number of appraisers, the least number of
appraisal projects and least area in every year, corporative representative and structure of
stockholders, etc. These regulations standardized appraisal companies and eliminated those which
scale was small and viability was weak. And appraisers have been distributed in a better way
among reforming companies. Therefore, this act improved the company’s ability and helped the
industry developing better.

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3.2.2 Achievements of appraisal companies in 2004

Table 3.2 Achievements of appraisal companies in 2004
Company            The number of             Total appraisal building area   Total Appraisal Value
Name               Appraisal Projects        (10 thousand square meters)     (100 million Yuan)
THD                129                       12.18                           2.22
THEX               90(62)                    20.09                           4.03
TLD                96                        17.44                           3.01
THUX               304                       42.84                           7.36
TCX                5900                      66.82                           5.83
ZHX                39
FXR                2522                      24.53                           3.68
LCX                150
LSZ                179                       7.69                            1.65
(The blanks in above chart mean so small value which can be ignored.)

From the above graph, we can see that TCX is the one that have undertaken the most appraisal
projects with 5900 and the total appraisal value ranked the second of 0.58 billion Yuan. The first
one which has the highest total appraisal value is THUX with 0.736 billion Yuan. We also found
that the company ZHX only undertook 39 appraisal projects in 2004, which has the least operation
among the nine companies.

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3.2.3 The percentage of appraisal projects of different appraisal purposes (in 2004 and in

2005)

Table 3.3 The percentage of appraisal projects with different appraisal purposes of nine real estate
appraisal companies in 2004
        Company              Mortgage                                     Litiga
 Year              Class                Transfer     Removing   Auction            Others   Total
        Name                 Loan                                         tion
 2004   THUX       number    219        10           47         28                          304
                   percent   72.04      3.29         15.46      9.21
        TCX        number    185        5656         14         1         3        41       5900
                   percent   3.14       95.86        0.24       0.02      0.05     0.69
        TLD        number    76         5            9                             6        96
                   percent   79.17      5.2          9.38                          6.25
        THEX       number    41         11           1          2         1        6        62
                   percent   66.13      17.74        1.61       3.23      1.61     9.68
        THD        number    67         52                                         10       129
                   percent   52         40                                         8
        FXR        number    219        2303                                                2522
                   percent   8.7        91.3
        LCX        number    150                                                            150
                   percent   100
        ZHX        number    39                                                             39
                   percent   100
        LSZ        number    179                                                            179
                   percent   100
        Total      number    1175       8037         71         31        4        63       9381
                   percent   12.5%      85.7%        0.8%       0.3%      0.0%     0.7%     100.0%

From the Table 3.3, we can see that THUX and FXR have the same highest appraisal operation
with purpose of mortgage loan, i.e. 219, among the nine companies. Especially the proportion of
this kind operation accounted for 72.04% in the total number of appraisal projects for THUX.

For the purpose of transfer, TCX obviously dominated in the market. This kind of operation
occupied about 95 percent as a whole for TCX. FXR ranked the second with 2303 transfer
appraisal projects. As the same with TCX, this kind of appraisal is the most operation for FXR.
Other companies just have little or no appraisal projects of property transferring.

For the appraisal operation with purposes of removing and auction, THUX accounted for the
significant share. TCX undertook most appraisal projects with other purposes.

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Table 3.4 The percentage of appraisal projects with different appraisal purposes of nine real estate
appraisal companies in 2005
          Company             Mortgage                                     Litiga
Year                Class                Transfer     Removing   Auction            Others   Total
          Name                Loan                                         tion
2005 年    THUX      number    297        3            5          35                 1        341
                    percent   87.1       0.88         1.47       10.26              0.29
          TCX       number    101        5475         17                   7        106      5706
                    percent   1.77       95.95        0.3                  0.12     1.86
          TLD       number    194        26           12                            12       244
                    percent   79.5       10.66        4.92                          4.92
          THEX      number    55         16           2          1         2        2        78
                    percent   70.51      20.51        2.564      1.28      2.564    2.564
          THD       number    103        119          5          8                  31       266
                    percent   39         45           1          3                  12
          FXR       number    171        2314                                                2485
                    percent   6.9        93.1
          LCX       number    263                                                            263
                    percent   100
          ZHX       number    132                                                            132
                    percent   100
          LSZ       number    177                                                            177
                    percent   100
          Total     number    1493       7953         41         44        9        152      9692
                    percent   15.4%      82.1%        0.4%       0.5%      0.1%     1.6%     100.0%

From the above table, the number of appraisal projects of mortgage loan of THUX was still the
most with 297 among all the companies. However, this kind appraisal operation‘s number has
been increased obviously to different extent for other companies except TCX and FXR. The
amount of this kind appraisal increased by 27% compared with year 2004.

TCX was still the first for the operation of property transferring. And FXR also still ranked the
second in the same kind of appraisal. The total amount of appraisal projects for property
transferring has a little decreased in 2005.

For the purpose of removing, TCX changed the complexion in 2004 and has the most operation
with 17 projects.

The number of appraisal projects with other purposes has been increased to 152, which was about
two times of last year’s.

The total amount of appraisal operation reached 9692 compared with 9381 in 2004.

                                                 17
3.2.4 Share of appraisal projects of different appraisal purposes

                                                     property transfer
                                                     mortagage loan
                                                     remove
                                                     auction
                                                     litigation
                                                     others

From the above chart, we can find that the appraisal projects which purpose is property transfer
accounts for the highest of all purposes. The percent was 85.7% in 2004 and 82.1% in 2005
respectively. The second one is the appraisal with the purpose of mortgage loan. The proportion
was 12.5% in 2004 and 15.4% in 2005 respectively. The projects with the purpose of removing
refer to those properties that should be removed because the government makes the new urban
planning such as rebuilding the old zone. The residents will be compensated by government
according to the market value of removed properties. The percent of this purposes occupied 0.8%
and 0.4% in 2004 and 2005 respectively. The appraisal operation for other purposes only account
for such a small share. And we also find out the proportion of different appraisal projects in 2004
and 2005 is the same by and large. But, the number of appraisal projects increased by 3 percent
compared with the year of 2004. The real estate appraisal market is more active. And the number
of some purposes’ appraisal operations is obviously increased, such as litigation, auction and
others.

3.3 Analysis and conclusions arrived

3.3.1 Low Professional quality of appraisers

Through research, the scale of real estate appraisal companies in Tangshan is not big and the
percentage of appraisers accounting for the total employee is about 80%. It means there are at
least eight appraisers if the total number of employees is ten in a company. There are total 69 real
estate appraisers in Tangshan including 20 people who have just passed the exams. In the files of
49 appraisers, there are two persons with postgraduate background, 21 with graduated background,
20 with junior college and 6 with technical secondary school. Their majors involve accounting,
economics, civil engineering, law, architecture, real estate management and survey etc. The
appraisers who have bachelor degrees are less than half in a whole. Therefore, the education level
of appraisers is not high in general.

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Another problem about appraiser’s quality is narrow professional knowledge and simple appraisal
techniques, which resulted from imperfect examination system and lack of continuing education
and retraining. First of all, from the research we know the backgrounds of appraisers in Tangshan
are wide such as civil engineering, law and accounting etc. There are two reasons to explain why
the real estate appraisers have diversified backgrounds. In China, there are few universities which
provide the major of real estate management or relevant specialty with real estate. So few
graduates with real estate background deals with real estate appraisal practices. Another reason is
that the appraiser’s examination is easy and not strict. At present, the theory of real estate appraisal
and appraisal techniques is not mature. Therefore the requirements for appraisal techniques are not
high. Just for this reason, it is very easy for people to enter this industry even if they have not
enough professional knowledge.

In developed countries, the real estate appraisal industry welcomes those professionals with
diversified backgrounds, because real estate appraisal involves lots of different fields, such as
architecture, economics, finance, urban planning, management, accounting and law etc, which is
interdisciplinary cooperation. However, before dealing with real estate appraisal, people whose
background is not relevant to real estate should be trained and asked to participate in some special
courses, such as real estate economics, real estate finance and real estate appraisal approaches, etc.
But, in Tangshan I found the appraisers whose major is not relevant to real estate only passed the
exams and obtained the license, but do not know fully about necessary knowledge connected with
real estate appraisal. Furthermore, there is lack of training before starting to appraise and lack of
continuing education after dealing with appraisal operation. With development of the appraisal
theory and invention of science and technology, appraisers need to learn more knowledge and
advanced technology to improve their professional level. Therefore, training and continuing
education is a must for appraisers to keep up with society development.

Another reason inducing the low professional quality is due to the appraiser’s exam system.
Although there are explicit requirements to apply for licensed appraisers, checkup for satisfaction
of these requirements in different areas is not equally strict. The applicant’s qualification should
fulfill the basic conditions from the professional background, the educational level, and practical
experiences. For example, people who has bachelor’s degree in real estate appraisal and has at
least four-year relevant practical experience, in which dealing with real estate appraisal’s time is at
least three years, are able to apply for the licensed appraiser’s exam. Because the degree of
tightness to inspect the qualification of applicant before exam in different areas is so different, it
resulted in lower entrance requirements in areas of looser checkup. Some people who are not
meeting the basic requirements may become appraisers. The contents of the exam are lacking of
flexibility and absent to connect with practice.

3.3.2 Lack of qualification’s classification management

Real estate appraiser’s exam is a one-off exam and all people who passed the exam have the same
grade. It means if one person passes the exam, he or she will be an appraiser after registration in
the whole vocation and there is no classification among licensed appraisers. All appraisers are the
same whatever he or she has just became an appraiser or dealt with appraisal work for many years.

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As thus, appraisers’ experience and professional level cannot be shown. And it does not provide
incentives for appraisers to improve their professional techniques. Neither does it impel appraisers
to participate further study or retraining. Furthermore, when management department examines
and authorizes the qualification of appraisal companies, they will simply check the number of
appraisers but the professional ability and experience are ignored. Because in No. 142 Statute, the
number of appraisers in one company is one condition to assess the grade of appraisal companies.
For example, the company with first qualification grade should have at least 15 full-time
appraisers. The company with second grade should have 8 full-time appraisers at least. Such that,
the simply number of appraisers only expresses the general appraisal competence and cannot
reflect the differences of technical competence. Neither does it provide powerful evidence about
professional’s ability for company’s qualification certification.

3.3.3 Monopolization existing in appraisal industry

In the interviews, the principals of different companies remarked one phenomenon at large: some
companies depend on past relationship with the former government departments or enterprises to
get appraisal operations. A lot of appraisal companies were established after being separated from
a government section or a bank, etc. Even if they were separate from the former institution, the
former affiliated enterprise would still like to primarily use “own” appraisers. In this way,
monopolization appears in real estate appraisal market, especially for some appraisal purpose.
From the above data, we found the composition of appraisal operation that different companies
undertook were distinct. In the city area of Tangshan, almost all the property transfer’s operations
were undertaken by TCX company. And THUX company occupied significant share in removing
appraisal. The TCX Company was separated from the former housing management department.
And all transferred house should be registered in the housing management department. If this
department thinks the price of property is not in accordance with the price they grasp, they will
relegate to TCX Company to reassess the property. Some appraisal company was affiliated with
some big bank before reforming. Therefore, it got many operations involving mortgage loan.

Thus it can be seen, although the real estate appraisal companies have been reformed from 2001,
in fact some companies which were divided from government section and reestablished still have
connection with the former institutions. Thus instance has resulted in monopolization in this
industry. This unfair competition restricts development of this industry. Now there are two types
of real estate appraisal companies: one is founded to become a stock-shared company separated
from the former real estate management sections. The other is with no government background
and operating in market regulation. Because of monopolization, the latter often rely on the former
to undertake “second hand operation” or balefully compete with first. They often reduced the
appraisal fee or gave backhander to clients in order to obtain more projects. And they also
disregarded the real estate appraisal code and procedure and overestimated or underestimated the
value according to client’s desire. These behaviors disturb the market order and damage the
benefits of the third party. The credit of real estate appraisal industry was lost.

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3.3.4 Professional ethics problem

During interviewing, through researching different purposes’ appraisal projects, most principals
considered the real estate appraisal market in Tangshan is not enough to segment. I am very
curious about this phenomenon after I knew the status of appraisers in Tangshan. Currently, the
number of real estate appraisers is 69. However the total area of Tangshan is 13,472 square
kilometers and the population is 7.10 million. The number of appraisers is so small compared with
the population. In America, taking the example of Texas, in average, there is one appraiser per
5,000 people. Houston which belongs to a bigger city in Texas has around 50 companies.
Therefore, with the comparison of number, it is very strange why the appraisal market in Tangshan
is saturated.

In addition, comparing the number of appraisal projects in 2004 with the number in 2005, the
appraisal items’ total amount increased by 311. Because of the increased population year by year
and relevant policies’ influence, real estate exploitation and correlative economic activities are
more and more active. Consequently, the real estate appraisal‘s market is also becoming bigger.
Even if we compare the total appraisal value per year in other cities with that in Tangshan, we also
found the appraisal market is not small in Tangshan. However, why people in real estate appraisal
companies reflected the market is not enough to segment and they only survived in tough
competition?

The monopolization is one of the most crucial reasons. Other real estate appraisal companies,
which have no relationship to government or enterprises, depended on decreasing appraisal fee to
compete with each other. And some companies took the backhander as the bait to obtain the
appraisal project. This unfair competition is disturbing the normal order. For the objective of
getting excess benefits from clients, some companies often manipulated the appraisal result to
satisfy the client’s need. These behaviors badly violate the professional ethics standard. And if the
properties’ value was overestimated or underestimated by appraisers, the relevant third party will
lose the benefits. Such as the bank which provides mortgage loan will take more risk due to
overestimate by appraisers. The bad debt resulted by this reason may be easy to function to induce
the bubble in economics. In this way, the financial system may collapse. The low appraisal fee is
another measure of baleful competition with concomitance of low appraisal quality. The State
Charge Regulation is made by sufficient research and demonstration. When appraisal companies
competed by “price war”, the normal cost expended will be compressed. Cutting down the
necessary cost must result in reducing the manpower and information materials’ cost. The
appraisal work needs abundant information so that the appraisal value is precise and objective.
However, owing to reducing the normal cost, the appraisal’s quality must be affected.

Therefore, the professional ethic should be inspected by the management department. The absence
of professional ethic restriction will incur the credit loss in this industry. Furthermore, the
development of real estate appraisal industry will be blocked. The executive professional ethic
standard should be established and corresponding monitoring system should also be set up to
guarantee its performance.

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3.3.5 The confusion induced by multi-administration’s intercross management

Because of special real estate rights and interests system, building and land can be appraised
separately. However, in developed countries, the property should be generally assessed as a whole.
Cross management for the same thing by different management departments induced confusion.
For example, some real estate appraisers reflected that the land appraisal reports they valued are
not admitted by land management department which only accepts valuation by land appraisers. In
China, the appraisal industry is composed of real estate appraisal, land appraisal and asset
appraisal, which is belonging to Construction Ministry, Soil Resource Ministry and State Asset
Administrative Ministry respectively. The corresponding appraisers are real estate appraiser, land
appraiser and asset appraiser respectively. According to the regulation, real estate appraisers can
value the building and land. The land appraiser can only value the land. The asset appraiser cannot
assess the real estate but movable assets, such as machines. And different types of appraisers
should obey the requirements of corresponding management departments. Every administrative
department has their own management system and most management measures have been made
from their own.

Lack of harmony and communication among different management departments results in distinct
standards for the same thing. For the land appraisal, there are different standards between the
Construction Department and Soil Resource Department. When one land appraisal report has been
disputed, the report written by real estate appraiser is not admitted by land management
department. The value of the land should be reassessed according to the regulation made by land
management department. Because all the appraisals related to land should be registered in Land
Department which only accepts the appraisal that accords with Land Department standard.
Therefore, many reports wrote by real estate appraisers cannot be accepted. Different standards for
the land appraisal which are made by different management departments induced in
cross-management and confusion in management. The professional authority of real estate
appraisers has been disparaging. And the social resources have been wasted owning to reassessing.

3.3.6 Imperfection of law and code system

Until now, there is “real estate appraisal code” issued by China Ministry of Construction in aspect
of appraisal techniques. There is also a code for appraiser’s management—The Management
Measures for Real Estate Appraisers. And the Management Measures for Real Estate Companies
which was issued recently is included. However, from the whole industry, incomplete law and
code system influences the development of real estate appraisal industry. Lack of laws and codes
about industry’s supervising results in confusion of management, such as the problem that
companies decreased the appraisal fee for contesting the projects. The lower return results in low
quality of report. Even appraisers amended the reports to accord with the clients’ will. The
objectivity and justness of appraisal has been lost. Owning to absence of uniform professional
ethic code and effective supervising system, these behaviors cannot be controlled. Although there
is the code to indicate clearly the appraisal fee standard, in fact no company charges according to
it in Tangshan. The problems of monopolization and backhander are also insuppressive because of

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