QUALITY OF VALUATION REPORT IN MALAYSIA MUHAMMAD NAJIB RAZALI ([email protected])[email protected] Universiti Teknologi Malaysia (UTM) DAVID MARTIN JUANIL

QUALITY OF VALUATION REPORT IN MALAYSIA

MUHAMMAD NAJIB RAZALI ([email protected])Universiti Teknologi Malaysia (UTM)

DAVID MARTIN JUANIL Universiti Tun Hussein Onn Malaysia (UTHM)

GRAEME NEWELLUniversity of Western Sydney, Australia (UWS)

INSPIRING CREATIVE AND INNOVATIVE MINDS

mailto:[email protected]

Introduction

• The issue of professional valuation practice standards has recently been the focus of attention in many parts of the world.

• The findings obtained from the survey will be used as a guideline to develop a framework for quality valuation report.

• Specific issues to be addressed in the survey include quality and reliability of valuation reports, information content of valuation reports, client satisfaction with valuation reports, perceived weaknesses in valuation reports, and suggested solutions to these perceived weaknesses.


• To assess the quality of commercial valuation reports as seen by users of commercial valuation reports in Malaysia

• To assess the level of client satisfaction with valuation reports in Malaysia

• To develop a framework for improving the quality of valuation report for commercial property in Malaysia


Objectives

• General issues of professional valuation standards and the quality of valuation reports have been examined in many countries. In the UK, in addition to the Royal Institution of Chartered Surveyors (RICS) valuation standards and procedures (RICS, 2003), various industry reports have addressed a range of key issues regarding the quality of the valuation process and valuation reports.

• These include ensuring credibility, reliability and clarity in commercial property valuations (Mallinson Report, 1994), assessing valuers’ compliance with the reporting standards of the RICS Red Book (Waters Report, 2000) and ensuring public confidence in the valuation process (Carsberg Report, 2002). Crosby et al (1997) surveyed users of valuation reports in the UK to assess the quality of commercial valuation reports in the UK, with implications for improvements to UK commercial valuation reports identified. The quality of valuation reports has also previously received considerable attention in the US (eg: Colwell and Trefzger, 1992; Dotzour and Le Compte, 1993; Knitter, 1995).


Research Problems

Methodology

A survey designed to obtain information concerning the quality of commercial property valuation reports in the Malaysian property industry was conducted in September 2008. The survey addressed the following issues regarding the quality of commercial property valuation reports:

• survey respondent profile, including commercial property portfolio and valuation activity

• use and importance of valuation reports• selection of valuers• significant differences in valuation reports• valuation methods used• satisfaction with valuation reports• reliability of valuation reports• satisfaction with analytical details• weaknesses in valuation reports• solutions to weaknesses.

• Clients normally hire valuation firms to estimate the market values of properties. Thus, information of the market value of properties is required for several purposes such as for financing and investment decisions. According to Levy and Schuck (1999).

• As such, client need good and quality valuation reports that fulfil their requirements and intentions. As mentioned earlier, the valuation methodology will be a guideline for valuers to prepare the valuation report. Clients might have influence on valuations.


Valuation Report


Wyatt (2001) makes some suggestion to improve valuation reports:

• Provide the calculation itself, not just the end value• Analyse competitor activity in market• Reduce descriptive content• Reflect the brief, any competent manager sets out the requirements of

the valuation at the outset, so any omissions in the report are due to poor instruction

• Demonstrate a better understanding of building systems and their cost in use

• Reflect worth or comment on obsolescence rather than just fix a price.• Improve accuracy• Include demographic information.


Findings

Date of survey : September 2008

Number of property organization surveyed : 350

Number of responses : 73

Survey response rate : 29%

Make-up of survey respondents:

REITs 16.4%

Insurance companies 19.2%

Property developers 15.1%

Corporates 12.3%

Pension funds 11.0%

Commercial banks 1.4%

Others 24.6%

Survey Respondents Profile


Commercial property portfolios of survey respondents

Total value of commercial property portfolio : RM15.51 billion

Make-up of commercial property portfolio (by organization)

REITs RM 4.41 billion (28.4%)

Corporates RM 2.37 billion (15.3%)

Pension funds RM 2.11 billion (13.6%)

Property developers RM 1.84 billion (11.9%)

Insurance companies RM 1.43 billion (9.2%)

Commercial banks RM 0.09 billion (0.6%)

Other RM 3.27 billion (21.1%)

Make-up commercial property portfolio (by size of portfolio)

< RM 20M 31.5%

RM 20-49 M 19.2%

RM 50 – 99M 9.6%

RM 100 – 499 M 17.8%

> RM 500 M 21.9%


Coverage size of commercial property

portfolios

(RM'000 000)

370

260130100

100

90

210REITs

Corporates

Pension funds

Property developers

Insurance companies

Commercial banks

Others


Extent of importance of purpose for using

commercial valuation reports

Purpose Percentage responding at least ‘important’

Overall REIT Insurance Companies

Property Developers

<20M 20-49M

50-99M

100-499M

>500M

Investment decisions 95.9% 83% 100% 100% 100% 86% 100% 100% 94%

Lending practices 90.4% 83% 86% 93% 87% 79% 100% 100% 94%

Legal requirements 90.4% 83% 100% 86% 91% 79% 100% 92% 94%

Property transactions 86.3% 92% 79% 71% 83% 86% 71% 85% 100%

Accounting/ auditing 71.3% 92% 79% 57% 61% 79% 71% 69% 81%


Selection of outside valuers

Percentage of respondents using procedure*

Procedure Overall REIT Insurance Companies

Property Developers

<20M 20-49M

50-99M

100-499M

>500M

Distribute amongst known firms/valuers

29% 25% 14% 43% 35% 36% 14% 15% 31%

Distribute amongst firms/valuers that can complete valuation whenever it is needed

29% 25% 14% 43% 35% 36% 14% 15% 31%

Use one firm/valuer known to the reliable

25% 58% 29% 13% 9% 29% 29% 31% 38%

Request tenders 23% 25% 7% 29% 30% 21% 14% 15% 25%


Extent of significant difference in commercial

valuation reports

Percentage responding ‘significant differences’

Factor Overall REIT Insurance Companies

Property Developers

<20M 20-49M

50-99M

100-499M

>500M

Accuracy of facts and data 37% 42% 21% 50% 39% 36% 29% 39% 38%

Quality of content of report according to professional valuation standards

28.8% 33% 21% 36% 35% 21% 29% 31% 25%

Clarity of report 28.8% 42% 14% 21% 13% 36% 43% 31% 38%

Reliability of evidence and market value

24.7% 25% 21% 21% 26% 7% 14% 54% 19%


Valuation methods used in commercial valuation reports Percentage usage valuation methods

Valuation methods Overall REIT Insurance Companies

Property Developers

<20M 20-49M 50-99M 100-499M

>500M

Office property

Income Approach 34% 34% 35% 36% 30% 39% 24% 29% 31%

DCF Analysis 28% 27% 29% 25% 29% 30% 31% 32% 38%

Comparable Sales 24% 25% 25% 22% 23% 23% 28% 25% 24%

Cost Approach 14% 15% 12% 16% 14% 13% 13% 14% 12%

Retail property

Income Approach 32% 39% 29% 56% 22% 28% 19% 26% 20%

DCF Analysis 31% 25% 42% 27% 34% 27% 24% 35% 37%


Cost Approach 14% 14% 9% 14% 34% 31% 35% 27% 27%

Industrial property

Income Approach 32% 34% 33% 29% 24% 20% 24% 22% 20%

DCF Analysis 33% 35% 36% 35% 32% 40% 28% 34% 37%


Cost Approach 22% 11% 12% 11% 30% 41% 39% 30% 32%


Percentage responding at least ‘satisfied’

Property sectors Overall REIT Insurance Companies

Property Developers

<20M 20-49M

50-99M

100-499M

>500M

Office property 72.6% 67% 71% 79% 65% 86% 86% 85% 56%

Retail property 84.9% 75% 86% 79% 91% 79% 86% 77% 87%

Industrial property 86.3% 83% 86% 86% 83% 100% 86% 96% 94%

Other investment property 86.3% 83% 93% 86% 96% 71% 86% 77% 94%

Extent of satisfaction with quality of commercial valuation reports

Percentage of valuations considered reliable

Factor Overall REIT Insurance Companies

Property Developers

<20M 20-49M

50-99M

100-499M

>500M

Content of valuation reports 57% 48% 55% 57% 60% 54% 50% 59% 56%

Estimate of market value 57% 52% 61% 53% 58% 61% 54% 55% 58%

Timing of report delivery 54% 53% 57% 51% 53% 51% 63% 54% 56%

Reliability of commercial property valuations

Perceived Weaknesses in Valuation Report

Weaknesses that figured prominently were:• Lack of details and discussion of analytical aspects: 32.9%• Failure to address the purpose of valuation report : 31.5%• Failure to understand the complexities and market position for particular property :

27.4%• Inadequate market analysis: 24.7%

These factors were also seen to figure as the major weaknesses in valuation reports in Australia (Newell, 2005); reflecting generic aspects regarding valuation reports in several countries. Importantly, a number of factors were not seen to be significant weaknesses; these include:

• too much reliance on historic aspects of market performance• limitations on valuation assumptions in valuation report• years of experience of valuers;

again, consistent with trends seen in Australia and reflecting integrity in valuers and valuation methodologies.

Suggested Solutions to Weaknesses in Valuation Reports

Five solutions figured prominently; namely:•more detailed valuation workings•more use of analytical techniques (e.g. DCF)•compliance with standards•more clarity of purpose in report•greater emphasis on current supply/demand situation

Importantly, a number of factors were not seen as priorities for suggested solutions; these include:•More experience by valuers

•Accuracy of facts/data used in valuation reports

Ranking of suggested solutions to perceived valuation report weaknesses (by organisation)

Rank of suggested solution

Suggested solutions Overall rank of perceived weakness

REIT InsuranceCompanies

Propertydevelopers

More detailed valuation workings 1 4 2 5

More use of analytical techniques 2 1 4 1

Comply with Malaysian Valuation Standards/ Securities Commission guidelines

2 1 4 1

More clarity in purpose of commercial property valuation reports

2 1 4 1

Greater emphasis on commercial property market supply/demand situation

5 4 4 1

Allow reasonable time period for delivery of commercial property valuation report

6 6 1 8

Improve accuracy of facts/data in valuation reports 7 8 3 7

Reasonable number of years of experience of registered valuers

8 6 8 6

Percentage responding ‘highly important’

Overall <20M 20-49M 50-99M 100-499M >500M

More detailed valuation workings 1 1 3 1 5 5

More use of analytical techniques 2 1 5 3 2 1

Comply with Malaysian Valuation Standards/ Securities Commission guidelines

2 1 5 3 2 1

More clarity in purpose of commercial property valuation reports

2 1 5 3 2 1

Greater emphasis on commercial property market supply/demand situation

5 1 5 3 2 4

Allow reasonable time period for delivery at commercial property valuation report

6 7 4 8 6 6

Improve accuracy of facts/data in valuation reports

7 6 2 7 7 7

Reasonable number of years of experience of registered valuer

8 8 1 1 8 8

Ranking suggested solutions to perceived valuation

report weaknesses (by size of portfolio)

Panel A: Organisation type

REITs Insurance companies

Property developers

REITs 1.00

Insurance companies

0.00 1.00

Property developers

0.90 0.00 1.00

Panel B: Size of portfolios (RM)

<20M 20-49M 50-99M 100-499M >500M

<20M 1.00

20-49M 0.00 1.00

50-99M 0.34 0.29 1.00

100-499M 0.92 0.00 0.40 1.00

>500M 0.88 0.00 0.08 0.73 1.00

Rank correlations between suggested solutions

Conclusions

• Commercial property valuation reports are key ingredient in the property investment decision-making process. Hence qualities of commercial property valuation reports are of fundamental importance to the professional standards property industry, as well as to the professional standards and the integrity of the valuation profession.

• This is particularly evident in the current market instability and uncertainty resulting from the global financial crisis. This has seen groups such as the RICS seek to further improve professional standards and ensure a high level of confidence in valuers and valuation reports at a global level.

This research project has surveyed major users of commercial property valuation reports in Malaysia to assess client perceptions of the quality of commercial property valuation reports in Malaysia. A wide range of issues were assessed relating to the quality of valuation reports and the integrity of valuers and valuation process.

• Key findings to emerge from this survey were:• survey respondent profile, including commercial property portfolio and valuation

activity• use and importance of valuation reports• selection of valuers• significant differences in valuation reports• valuation methods used• satisfaction with valuation reports• reliability of valuation reports• satisfaction with analytical details• weaknesses in valuation reports• solutions to weaknesses.

Documents

QUALITY OF VALUATION REPORT IN MALAYSIA MUHAMMAD NAJIB RAZALI ([email protected])[email protected] Universiti Teknologi Malaysia (UTM) DAVID MARTIN JUANIL