Business potential rating of appraisal companies, 2007
| Table |
Top-ten – appraisal of business and securities
Top-ten – appraisal of immovable property
Top-ten – appraisal of equipment and transport facilities
Top-ten – re-appraisal of assets/capital stock
Top-ten – appraisal of investment projects
Top-ten – appraisal of non-material assets and intellectual property
Speedy turn
The appraisal services market reached new heights in 2007. New regulation rules will compel appraisers to take into consideration both volume and quality of business.
Vartan Khanferian
The Russian appraisal market saw many events in 2007. Long discussions on advantages and faults of regulation models, based on state licensing of appraisal activity or self-regulation mechanisms, were finally put to an end. As of January 1, 2008 the amended law “On appraisal activity” canceled licensing of appraisers - it is now enough to be a professionally trained individual involved with self-regulating organizations (SRO) and responsibility-insured. At the same time SRO were officially and legally recognized. Besides, three federal appraisal standards were approved in 2007.
| Diagram 1. Appraisers’ revenues in 2007 exceeded 7 bln rubles
Consolidated revenues of appraisal companies 
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One might think that in view of large-scale transformation the appraisal market should stand still for a while. But nothing like that ever happened. At least, according to our rating. Consolidated revenues of 119 appraisal companies in 2007 increased by 65% - 8 percentage points above the previous year – and reached 7.15 bln rubles (diagram 1). Last time the market saw such acceleration in 2003. The energetic development may be easily explained.
Beneficiaries of corporate reforms
The simplest way is to attribute such results to general economic growth. Actually, appraisers themselves explain the growing demand by favorable economic circumstances. “General economic growth in Russia makes quite an impact and is accompanies by investment activity, state structures included. Many companies keep on developing and restructure their business. The appraisal market benefits from the situation”, - says Sergey Edomsky from Institute of Entrepreneurial Problems.
| Diagram 2. In 2007 40% of appraisers’ revenues came from energy, oil and transport
Appraisal companies’ revenue structure by industries 
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But the corporate factor made more powerful input to the 2007 growing demand. Till recently the electric energy sector – being in the state of transformation - was of strategic importance for appraisers. Presently the VIP-clients’ circle widened due to transport and oil sectors. These two sectors in 2007 exceeded 40% of total appraisers’ revenues (diagram 2). Main growth drivers: final stage of RAO UES reforming, gigantic RZhD transformation and redistribution of YUKOS oil assets.
“2007 was a break-through year for reforming of the Russian energy sector. Many serious deals were followed by re-distribution of large-scale energy assets. At the reform final stage we appraised GidroOGK and InterRAO foreign assets. Capital stock of five territorial-generating companies was appraised for IFRS in association with foreign auditors. We implemented the largest projects together with our partners, including leading international consulting companies”, - says Sergey Edomsky, explaining emphatic increase (4 times) of revenues in his company. Altogether energy companies form the strongest demand for appraisal services. In 2007 appraisers’ revenues from energy sector amounted to 1.3 bln rubles (18.7% of the market). But the growth seems to have already reached its peak. The current rating showed the segment increment 71% against 84% the previous year (diagram 3).
Transport companies are ready to follow suit. In 2007 appraisal services to transport and communication enterprises went up by 88% and reached 659.4 mln rubles (9.2% of the market). RZhD is a key partner of appraisers. The railway monopoly’ reform has been ongoing. Giving businesses status of legal entities, restructuring of mother companies definitely require appraisal of assets. In 2007 the tender to serve railway companies was won by 55 appraisal companies, 29 of them were presented in our rating. The main appraisal operations would take two years - therefore earnings of RZhD appraisers would be growing and growing. Communication companies with Sviazinvest in the lead would also contribute to increased revenues of the appraisal market.
Consolidated appraisers’ revenues in oil and gas industries went up by 79% last year and amounted to 935.2 mln rubles. The industry is strongly saturated by appraisal companies – 90 out of the rating participants. According to their data, 583.3 mln rubles came from business and securities appraisal and 143.6 mln rubles – from appraisal of immovable property. Last year dynamic increase of appraisers’ revenues in the sector was preconditioned by appraisal works in relation to YUKOS bankruptcy. The project brought to appraisers over 20% of total sector revenues. The project took stock of the mother company and its daughters. Some companies really stroke gold by being involved with the project. Thus, in 2007 ROSEKO (appraisal of YUKOS and Rosneft) increased its revenues by 6 times.
Diagram 3. Appraisal need goes down for energy enterprises and up for transport ones
Appraisers’ revenues in different branches of economy, three years, %
Financial and construction companies’ were mostly responsible for the last year increment of appraisers’ revenues, but not this year. Incremented revenues for services to financial institutions went down almost two times, and the share declined down to 8%. Still, the demand in the sector is there. Daniil Slutsky from department of appraisal of MKPCN, says: “The last year insurance market consolidation raised clients’ interest in business appraisals in view of mergers and acquisitions. For instance, a large insurance holding ordered us to conduct due diligence of a leading regional insurer. The insurer’s business was thoroughly and comprehensively appraised”. The construction sector revenues went down by ten times and reached 13%. The demand fall was caused by liquidity crisis. Sergey Silantiev from VIP-client department in PriceInform says: “rigorous demands of banks to borrowers limit a number of credits, thus reducing scope of works to make appraisals for crediting purposes”. In the absence of cheap money a number of construction projects, requiring appraisals, notably declined.
Still, 106 rated companies mentioned their operations in the construction sector, which is quite a few.
New rules
Changed regulations of the appraisal market will inevitably bring about quality shifts. Self-regulation and new federal standards of appraisal should contribute to ousting from the market players incapable of high quality operations. “Current year will be very difficult for many appraisal companies. Medium-sized companies with net profits about 30-50 mln rubles a year, rendering standard set of services, find themselves in the risky zone. If universal appraisers have to stay competitive, they need to move to another financial category with annual turnover at least 100 mln rubles. Another way to reach relative stability – without drastic increase of profits - is to find its niche at the market and turn into specialists in some narrow and complicated field”, - says Igor Tsukanov.
Under new circumstances extensive development of companies, requiring new appraisal experts, has proven to be limited. Presently only an SPO member with personal property responsibility may become an appraiser.
The current rating already shows certain elements of a changing situation.
In 2007 the market tended to be more concentrated. Thus, 15 market leaders (appraisal revenues) were accountable for 60% of the market volume - 6% over the previous year. At the same time a number of employees have been stalling. The last year increase of appraisers in our rating increased by 14% comparing to 18.5% in 2006. As a result companies operate more efficiently. Average revenues per specialist went up by 44.4%.
Another consequence of the appraisal activity reform should manifest itself in gradual pushing out dumping – the market standing evil. New regulations provide for mandatory insurance of appraiser’s responsibility with insurance sum to be no less than 300 thousand rubles – and the appraiser should contribute at least 30 thousand rubles to compensation SRO fund. Under such conditions you would hardly offer superficial services for symbolic payment. “Self-regulation was in a way responsible for appraisal increased rates, since a legal entity has to pay dues to the SRO compensation fund, to which employees have to belong. At the same time, appraisers’ rates made no high jump so far”, – says Irina Belysheva from BKR-Intercom-Audit appraisal department. SRO would also contribute to the fight with dumping by controlling activity of its members. Any SRO would be against un-professional appraisals to avoid improper market deals and court trials. Obviously, if something happens, a compensation fund would be held responsible.
The regulation changes have its flip-side, not always hailed by appraisers. For instance, next to increased financial burden, the amendments provide for being responsible with your own property in case of losses, caused by wrong appraisals. As a result, many appraisers leave the field.
Thus, 22 companies out of our list have negative increment of specialists. Presently an appraiser may easily find less risky and responsible job in another branch of economy. “Draconian” amendments about property responsibility of appraisers compel good specialists to go to adjacent areas, like investment companies, banks etc”, – says Oleg Kushliansky, ENPI Consult director for appraisal and consulting. Federal standards also pay special attention to credibility of appraisals and make more rigorous demands to appraiser’s calculations. According to Aleksandr Zhiglo, FBK director of appraisal department, innovations in the appraisal area should result in mutual responsibility of all sides. “The appraiser should bear responsibility for quality of his work, the client – for credibility of his information, and the state should create conditions for business development, first of all, by making available the information, closed now in federal agencies and regional administrations”.
Lucrative niches
| Diagram 4. 2007 showed active growth of demand for appraisal of business, securities and investment projects
Revenue growth in different types of appraisals, the last three years, % 
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All the respondents referred to new practices of appraising assets for IFRS. Appraisal in the sector is not on a consistent demand, but revenues for main types of appraisal services show high dynamics (diagram 4). Says Valery Esaulenko, NEO Center general director: “recent trends see increased demand for appraisals in view of financial reporting in line with IFRS. Particularly, appraisal services for IFRS1 (first application) and IFRS3 IFRS3 (distributing cost of a deal) will be most demanded. The trend is preconditioned by the largest companies moving from Russian to international accounting standards, and by consolidation processes in numerous branches of industry”. According to Pavel Mikhalev, chief appraiser from FinExpertisa, “sufficient growth of appraisal-related operations to prepare financial reporting in keeping with IFRS is caused by increased share of public companies and demand for transformed reporting in keeping with IFRS. The whole procedure, in its turn, is impossible without fair appraisal of real value of such companies”.
Appraisal demand for IFRS contributed to development of business and securities appraisal. According to the rating companies, their revenues from such services exceeded earnings from immovable property appraisal (for the first time in the history of our rating) and proved to be the largest in the structure of appraisers’ earnings. The share was almost 39% against 32% the previous year (diagram 5). The turn of events was quite expected due to long history of the segment development. Business appraisal revenues acceleration in 2006 equaled 70%. The growth remained consistent in 2007 and amounted to 88%.
| Diagram 5. Business appraisal revenues in 2007 exceeded immovable property figures
Appraisal services earnings 
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Restructuring, mergers and acquisitions in domestic business demanded serious appraisals. Over half of business appraisal earnings are paid due to such an economic activity. According to Irina Belysheva, “increased demand for appraisal of business and securities was motivated by consistent internal consolidation and business enlargement, increased number of mergers and acquisitions, requiring appraisal of business market activity and calculation of shares conversion”. Besides, says Valery Esaulenko, “according to article 84 of the law “On joint stock companies”, you need appraisal to complete a consolidation process and make a mandatory proposal to minority shareholders to purchase their shares”.
Appraisal of immovable property revenues showed some positive dynamics (44.7% comparing to the previous year), but the share in the total appraisal revenues went down by 2.5 percentage points. Immovable property appraisal is mostly crediting-related and covers property complexes for collateral purposes; increased costs of credit resources for legal entities resulted in reduced volume of collateral appraisal and impacted accelerated revenues in the segment.
Demand for appraisal of immovable property may be explained by other reasons, too: mortgage development, appraisal of housing and non-housing property in case of buying and selling, appraisal of land, and complex services to appraise immovable property and regional economic development. Says Mikhail Zeldin, Avers president: “last year complex services acquired popularity. The same piece of immovable property is first calculated for buying and selling, then for mortgage, then for IFRS. A good example is operations with St.-Petersburg Vodokanal – to appraise the property market cost, possible areas of water supply and water drainage and corresponding activity for temporary land occupation. The Russian real economy sector is quite attractive and secures stable growth of orders for appraisal of business and immovable property in the regions. Our clients, borrowers and credit organizations move their business to regions and explore new areas, like chemical industry, cottage building, food industry and construction”.
Sochi party
The decision to hold Winter Olympics in Sochi raised special hopes among appraisers. Appraisal companies expected multi-million orders in view of appraisal of plots of land and immovable property in Imereti bay to be exempted in favor of the Olympic infrastructure, and of losses caused by exemption of land and immovable property. But some market players were pretty skeptical about their involvement in “the Olympic contract”. Thus, a head of an appraisal company refused to participate in the tender, saying: “cost appraisal works will be mass, identical and standard due to lack of information; on the other hand, many people do not want to leave their dwellings – trouble is in the air ripe with judicial consequences”.
In spring of 2008 “Olympstroi” conducted the first selection of appraisers (lot ¹1-ÎÊ “Appraisal of immovable property”). This is the list of winners: ABM Partner, Institute of Appraisal and Property Management KubGTU, United Enterprise for Appraisal and Expertise of Special Sites and Investments and Center for Economic and Legal Expert Assessment. Three of them are found in our rating. ABM Partner and United Enterprise for Appraisal and Expertise of Special Sites and Investments belong to the second group (high business potential) and Center for Economic and Legal Expert Assessment belongs to the fourth group (satisfactory business potential).
According to Aleksandr Koniakhin from Center for Economic and Legal Expert Assessments, the selection was pretty tough. His company managed to win due to extremely serious approach to preparation of corresponding materials. “Out competitors brought in small boxes of documents, in line with the tender demand, but without reflecting all types of their appraisal activity for the previous year. We brought to Moscow from Sochi 15000 copied documents (over 100 kg of paper), which fully characterized our annual operations: from appraisal of small garden plots to large-scale industrial objects, mostly located in Krasnodar territory”.
Not everybody is agreeable to such an approach. Mikhail Vasenin from Russian Board of Appraisers presents his point of view: “the tender organizers show strange and, to my mind, excessive interest in confidential information in relation to all clients of appraisal companies”. Dmitry Kuvaldin, chairman of National Board of Specialists-Appraisers says the tender procedures should be improved: “If the state is interested in quality appraisal, it should set objective and transparent selection rules, probably, establish a standing tender state committee? The questions may be answered by Ministry for Economic Development and National Council, responsible for appraisal regulation activity”.
- 2007
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