The Taiwan Banker

The Taiwan government has worked hard to promote urban renewal. For instance, the Financial Supervisory Commission (FSC) revised regulations pertaining to commercial banks investing in real estate, and the real-estate self-use rate subsequently fell from 50% to 20%. Also, the period to obtain self-use real estate was changed from 7 years to 2 years. Publicly listed banks have benefited significantly from these changes. Many are in the process of evaluating land or property for investment with the expectation that urban renewal can generate significant returns for them. Despite Taiwan's consistent efforts to promote urban renewal and reinvigorate its cities, many cases have failed to move forward. Urban renewal is difficult. Most obstacles can be attributed to opposition from residents of units. In many cases, the process then becomes mired in litigation between developers and occupants of units. Over time, this has hurt urban renewal efforts in Taiwan as investors (both banks and developers) hesitate to initiate the process, given its high rate of failure. What is the fundamental problem with urban renewal in Taiwan? Are residents of units too greedy or obstinate? Or is there is a problem with the overall process? And how can this be resolved? Kuo Kuo-ren, president of The Real Estate Appraisers Association of Taipei City and chief executive officer of the Honda Real Estate Group, believes the appraisal system in Taiwan has long been plagued by deep-seeded problems. His proposals to improve the system can be seen below. The real-estate appraisal system in banks should be done by an independent professional appraiserFrom the standpoint of industry, there is room for improvement in the nation's real-estate appraisal system. In a typical case, the internal employees of a local bank conduct the appraisal after which they will decide the percentage of the total real estate value they will provide as a loan. Very few private banks are willing to outsource a case once it surpasses a certain value. In the past two years, some Taiwanese banks encountered mortgage fraud. After conducting investigations, they found the culprits were bank employees. Some loans were extended to unqualified borrowers. In other cases, the price of the real estate was unreasonable or collateral was overvalued. These types of scenarios present unacceptably high levels of risk for banks. In contrast, global banks typically outsource appraisal work to professional external appraisers. Using the example of Citibank, Kuo notes that its real-estate appraisal system is sound and complete. During the process, the outsourced professional appraiser plays an intermediary role. A multi-person credit team then audits the results of the appraisal. The credit unit will note if any information is incomplete and judge if the appraiser is professional and objective or not. During the process, one contact window keeps both the bank and the appraisal unit up to date. Meanwhile, the banks' sales department continues with its work as usual and has no direct contact with the appraiser. This ensures the sales department of the bank does not interfere with the appraisal process, such as by pressuring the appraiser. To put it simply, each stage of Citibank’s appraisal process is intended to minimize risk and prevent an incorrect appraisal. With regards to urban renewal in Taiwan, Taiwanese banks should follow Citibank's example: Optimize real-estate appraisal by outsourcing it to an independent professional appraiser. Selection of the appraiser should be transparent, random and fair The public would say that the most difficult part of urban renewal is disagreement on price between the occupant of a unit and the buyer, Kuo observes. Yet, how can this happen frequently if the results of the appraisal are thoroughly audited and vetted by the appraiser, the Department of Land and scholars? In Kuo's view, residents of units sometimes aim to get greater compensation than what is being offered, for instance more than NT$1 million per ping, rather than the NT$800,000 offered (a price decided by a professional appraiser). In this type of situation, the main problem is that the resident has his own considerations, not that the appraisal is wrong. Of course, it is unlikely a resident would openly state his personal reasons for disagreeing with the price if they could not strengthen his negotiating position. For instance, some people with financial problems may truly need additional compensation from a higher appraisal. Others are greedy. And some people may simply have an emotional attachment to a property and not want to see it torn down. Kuo notes that if developers and residents cannot agree on the price, then the project will be stalled. Thus, weaknesses in the appraisal system are the root of this problem. The overall process makes it difficult for residents to trust developers. For residents of units, one of the biggest issues is the fairness of the appraiser selection process. According to Article 6 of the Measures for Transformation and Implementation of Urban Renewal, prior to urban renewal, the value of a property should be decided by more than 3 professional appraisers, who are appointed by developers or the Urban Renewal Association. If the results of their appraisals are close (within 20%), then the developer can directly choose the one he thinks is most accurate. The problem here is clear. People are going to be suspicious of the results when developers have the sole power to select appraisers. This certainly does not serve the interests of property holders. Unless property holders conduct their own professional appraisals, they will fall prey to predatory developers. Clarify criteria for selecting appraisers Worse still, some black-hearted developers pressure appraisers to lower the appraisal price to push down the overall sale price. This ultimately reduces the efficacy of urban renewal as residents become less likely to agree to an appraisal in the first place. Further, in cases when the total cost is the same and developers push down the sale price, the shared burden will be higher. This lowers the amount of compensation residents can get. Developers can profit from then turning around and selling the property at an inflated price (as their initial cost was lower than it should have been). 占便宜 take advantage To make the whole process more transparent, Guo suggests that there should be some basic conditions for selecting appraisers. Appraisers should never have been fined under Article 35 of the Real Estate Appraisals Law, have no criminal convictions related to real-estate appraisal, and no issues with integrity. With regards to evaluating professionalism, based on Taipei City's experience with urban renewal projects, appraisers should be in practice for more than three years and have handled more than one urban renewal case that was successful. Ideally, appraisers should be recognized by the Taipei City government as outstanding in their field. Real-estate appraisal associations should serve as gatekeepers to strengthen people's trust in the process If there are appraiser candidates who meet all the above conditions, how can the right ones be selected to ensure all parties benefit? The best way to avoid criticism is to have one of the three appraisers be from a real-estate appraisal association. The remaining two can be appointed by developers. If the developers agree, they can also allow the property holder to appoint one. In this manner, the appraisal process will become more transparent, independent and fair, and the public will have more faith in it. Once the appraisers recommended by the real-estate appraisers association have completed their work, they should submit it to the association for review. This can ensure the reports have no areas of concern and help to prevent disputes from arising later in the process, thus boosting overall efficiency. "Actually, I also told the Construction and Planning Agency (of Taiwan's Ministry of the Interior) that only one of the appraisals needs to be done by an appraisers association," Guo says. "This independent appraiser will be objective and fair, and under ordinary circumstances, the results from the other two appraisers should not different greatly from the one appointed by an association. If it does turn out that the results differ considerably, then everyone can go over them during the review process." In other words, as long as the right people are involved in the process, then we're already halfway to a successful conclusion. As for the remaining half, it is the procedure that counts. During past urban renewal projects, of the three appraisals, the one which benefited the property owner the most was selected. Kuo suggests that using the average price of the three appraisals will be more reasonable. This will ensure all three appraisers provide thorough reports and take responsibility for their work. This will reduce disputes and ultimately benefit a much larger number of property owners. Using the average price calculated from the three combined appraisals is also beneficial for developers and is much less likely to provoke conflict than the current system. From the standpoint of developers, having to manage multiple appraisals is confusing and can result in endless revisions. From the perspective of professionalism, the results of the appraisals are neither right nor wrong. Each appraisal is unique. Ultimately, what matters most is objectivity, fairness and transparency. Taking the average price calculated from combining the sums of the three different appraisals is the best way to minimize disagreement.