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Setting International Standards: The Royal Institution of Chartered Surveyors
27 Jan 2009
Louis Armstrong, Chief Executive Officer of the Royal Institution of Chartered Surveyors, discusses the RICS expansion into India and the RICS’ mission to establish uniform international standards of professionalism across the world and across property sectors.
The RICS has expanded into India because the economic development has proceeded so quickly that there has not been time to create a professional class of people who work in real estate which is now needed to deal with the range of commercial property development, regeneration and infrastructure issues that have come to the fore. The RICS is there partly because the government has recognised that it needs better standards, particularly of asset valuation, because so many of the banks have non-performing loans. Speculative valuations have not been done to international standards. In an economic downturn, the government has also recognised that you need less of a frenetic bubble atmosphere around the real estate market and more of a framework of standards, professionally trained people and people of integrity working in the field. In addition, because the universities in India have no courses to educate people in any aspect of real estate, they are keen to see whether the RICS can help to set up some form of Centre of Excellence for teaching professionals about real estate in India. So it is a combination of reasons and the major employers such as JLL, CB Richard Ellis, Cushman & Wakefield, Knight Frank, Colliers, they all want their existing professionals and the ones they are hiring to become qualified as RICS members. At the moment it is very difficult to do that in India, or has been historically, simply because there were no university courses, so it has been quite difficult to get trained and qualified.
To what extent do you think differing laws between states will be a problem?
It is bound to be a problem. The overriding federal drive from the Planning Commission, the Prime Minister and Ministry of Corporate Affairs is to attract foreign investment into India by having a more uniform standard across the states of professional service provision. It is similar to accountancy and law because they know this hinders the confidence of potential investors into the Indian economy. However, the reality is that there are differences between states and cities and part of what we have to do is adapt to those realities. At the same time we have to note that what both investors from oversees and increasingly the big domestic players in India want is a more consistent standard across the country. For example, the cost of construction and on the economic side, the valuation of property done to international standards - if you are trying to float your company on the Stock Exchange in Mumbai, the Stock Exchange is concerned about the widely varying ways in which underlying valuations have been done. Therefore we have to note and understand the local variations and, indeed, the national variations and the very distinct way in which things are done. For example there are some distinctive land law and landlord and tenant issues but also increasing awareness that everyone will benefit from a more consistent approach.
Do you find it harder to implement these standards in a country such as India where the market is heavily driven by domestic demand?
Yes, we are going to work with the Confederation of Indian Industry to try and make sure that most of the domestic players recognise why standards are a good idea. It does take a bit of time in a really rapidly growing economy for the big players to recognise that standards actually benefit everybody and will be useful but I would expect some of the developers to be quite happy with the way things are at the moment. Equally, if you look at the value of DLF, the biggest of the developers, it has dropped approximately 75 per cent in the last 6-9 months. It seems everyone has recognised that the golden days of the bubble of development have come to an end and we are entering a new phase of real estate development in India where the profit margins are unlikely to be as huge as they have been in many cases, but it is likely to be a more stable and sustainable market with better standards. This will not happen overnight as India enters the next stage of its real estate development. After this current downturn, more standards and better regulation will be a good thing for everyone, for the consumers, for the investors and for the major players in the market.
Do you agree with the view that the slowdown is not necessarily a bad thing as it will give the market chance to settle?
I would agree with that. Every bubble development, and we have seen the same all over the world over the last 10 or 15 years, is not healthy and it is unsustainable. It is great while it is happening but it has to come to an end. This one, in some parts of the world, has come to a slightly more bloody and dramatic end than anyone expected. No one expected the banks to move into complete paralysis mode for 15 months irrespective of the underlying dynamics of the property market. So the answer is yes, it is a healthy correction and ultimately everyone will benefit from a bit of a stock take and a re-think about a longer term and more sustainable way of developing the real estate market in India.
Which other countries does the RICS plan to move into?
In South America, Brazil has committed to move to international financial reporting standards by 2010, which is very fast. Now that will require international asset valuation standards for real estate in Brazil and we have been asked by the leading valuers to go there, a country which we have not been into before. So I would expect to move into countries like Brazil and Mexico. We have found that the only other top ten economy of the world we are not actually active in is Japan and that is because it has been very difficult culturally and linguistically but I would expect us to be doing further preparatory work there before setting up opportunities to qualify as an RICS member. As the economy there begins to pick up there is a huge real estate market and as it becomes slightly more transparent and there is more data available. We shall scale up a bit in Vietnam as privatisation continues and with the huge development potential of that wonderful coast, that will be another area of interest for us. We will also be looking at Turkey.
We do a lot in Malaysia which is still a very important real estate market which, in addition, exports contractors and expertise outside Malaysia. We operate in Thailand which is going through a very difficult political situation at the moment and we probably will not be expanding there in the foreseeable future. Singapore and Malaysia will certainly be interesting for us, with capital from the GIC and sovereign wealth fund in Singapore still available, and its export of expertise around South East Asia is important to us. I wouldn’t expect to be in Cambodia or Laos. Indonesia is a difficult market I would like to be in because of the size of the country, but I wouldn’t expect to be there for two or three more years at least because of the instability issues there which cause problems.
Does the RICS have an interest in Islamic Finance?
Yes. We are involved in Sharia-compliant financial instruments and the way in which mortgages and investments can be done. Pakistan is another big Muslim country where we have had an approach from a Member of Parliament and we are just considering what we might do there. Obviously, politically, it is never an easy country but if you take the combined populations of 180 million in Pakistan, Bangladesh, 150 million in Indonesia and China’s Muslim population is large, clearly that will be an area at which we will be looking in our medium-term strategy. This strategy is to position RICS as the ‘mark of property professionalism worldwide’ – that is a presence in all major countries to enable people to introduce common international standards of professionalism in real estate and enable professionals to qualify as RICS members.
What is the RICS involvement in climate change and sustainable development?
We have been closely involved for over five years with research, developing standards and international best practice for the property and construction sectors. We are going to do some discussions and seminars on that in 2009. The question is if you do not address the issue as a developer, even if you cannot afford it because times are hard, does that mean the building you are developing will not fetch as much money, will not get the best occupiers, the best rents, will become obsolescent very quickly and therefore will not last very long as a marketable commodity? I suspect the answer is probably yes. America is going to take a very strong line under Obama on climate change which I think will have a big effect on the setting and enforcement of standards right across real estate. The rising cost of energy itself makes the retro fitting of buildings a sensible economic thing to do to save on energy costs but I think it is all about tenant demand and linking it to the business case for having development both of cities, communities and individual buildings done to the highest standards. I think this is how the mood will be once the credit crunch is over, even if right now the last thing you probably want to do is invest more upfront in energy efficient climate change related activities.
Do you think LEED and BREEAM go far enough?
These systems are good as far as they go but they do not always get the best results. I think the answer is it is a framework and a tool kit, but it should not be seen to be the definitive answer. It is a start shall we say. It is a methodology that does not in itself necessarily provide the best solutions, in what are complex trade-offs between a whole range of conflicting factors if you are a developer, investor, planner, tenant, or a building control enforcer of standards. There is still a long way to go and a lot of governments are worried about the political unpopularity of insisting on higher standards, but I think governments have to lead from the front.
Do you think developments such as Masdar in Abu Dhabi will have an impact?
Initiatives such as Masdar are very good test beds for trying to get the theory put into practice from which other people can learn. They clearly are artificial in the sense that it would be rare to replicate them anywhere else. Technology moves very quickly and what you want to do is to invest constantly in much more efficient photovoltaic cells, much better use of the sun’s energy, much better alternative systems. You can then put them together in a Masdar-like integration in order to make a community or town work in the right way. We are heavily involved in trying to get the right balance between technological solutions individually retro fitted or much more importantly how you treat a whole town or whole city and retro fit it. Building something new is one thing in terms of trying to get the right balance of transport use and transport nodes so people do not have to commute too far, establishing offices, shops, houses and leisure facilities and integrating all the new thinking around sustainable communities with public-private money. Putting this alongside new technology is very complex and therefore you can learn lessons from Masdar. We certainly admire that sort of concept as a proving ground to learn lessons but it is probably not something you can necessarily replicate around the world on any scale.
Do you think tall buildings are sustainable?
I do think tall buildings have a place in any city’s design. The realities are that you do not want to pin all your solutions on one thing and think high density, tall buildings will solve all our problems. It is a mix and match approach of technology, planning of some tall buildings and accepting that human needs are not necessarily about living in tall buildings or working in them. I actually rather like tall buildings, I think they do have a place, they can be inspirational and they can be incredibly self sufficient although at a cost. If you look at Deutsche Bank’s headquarters in Frankfurt, which is a great example of green design; what did it actually cost them to do it? Rule one is do not believe everything the zealots and lobbyists tell you. Rule two is to learn from all sorts of different experiences and try and get a mix and match approach and to take the best from a whole range of ideas; and I think rule three is doing as much as you can that makes a real difference, retro fitting of insulation, for example, rather than saying tall buildings are the way ahead as that will just scratch the surface of the problem.
Do you think emerging economies such as India have a proactive approach to sustainability?
India is trying very hard in terms of sustainability but I think the problem is that the scale is vast. The nuclear deal with America is hugely significant and much more nuclear generation would be my recommendation to get the power to be less reliant on coal and oil. India has a huge issue with a shortage of infrastructure. It needs to develop new railway lines, much better roads and from that comes much better communications and transportation, perhaps becoming less reliant on short haul jets. The scale of the task is absolutely enormous to work through all those issues but they are committed and the American example now, having had eight years of denial under Bush, will enable them to take slightly more of the moral high ground with both India and China. China and India are the two biggest countries for emissions and need and deserve huge help from the West. The industrial revolutions of Western Europe and America have caused this problem and there is no point blaming China and India for opening a coal-fired power station a week, you really have to raise the level of debate above that.
Do you think as Indian infrastructure is developed, logistics hubs will become increasingly important?
Logistics are going to be big. There have been huge issues about getting public funding into infrastructure because of corruption and a lot of money is siphoned off. In some states I understand that as much as 70 percent of the money gets siphoned off on the way from the government to the project. It is better in the south, where it might be 30 percent, but there is still a huge leakage of the money that actually gets spent. A good example of how they are trying to solve this problem is the Delhi Metro which is partly funded by Japanese and German money. The management of the project also seems to be really good and they have not got the corruption issues that have plagued so many other infrastructure projects - it is on time and on budget which is very impressive considering it is 200km of line. So there are issues around the structure of the vehicles that deliver public infrastructure for logistics hubs. China can just direct it from the top and the government can decree they are going to build 30 international airports in a given year but it is much more difficult doing it in a democracy. India as a democracy has a much bigger problem in trying to take a centralised grip on infrastructure needs and get it delivered in an efficient way. It is a massive challenge but they have a lot of plans and recognise the problem but I know the solutions are not going to be that easy.
It is actually a good time for the RICS at the moment because so many countries around the world are saying they need better standards with the need to eliminate the wilder excess of this bubble real estate. What we need is a slightly more mature and reflective market with professional standards and qualifications. We are in a very buoyant position in this downturn and people want to work hard, better themselves and become qualified. The future isn’t in Western Europe and America, it is in the Middle East, India and China.
Source: Cityscape Intelligence