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Real Estate Market & Outlook Conference2016, Phnom Penh, Cambodia
Mr. Sim Hoy Chhoung
CPA & Certified Valuer
CEO,
Vtrust Appraisal Co., Ltd
Strengthening Propertyand Financial Markets
Through SoundValuation Standards
The views and opinions expressed in this article are those of the author and do notnecessarily reflect the official position of VTrust Appraisal Co., Ltd.
April 1st , 2016Phnom Penh Hotel,
Phnom Penh.
AgendaI. Introduction
II. Valuations for Financial Reporting
III. Valuations for Secured Lending
A. Case Study and Recommendations
IV. Property Market and Banking Sector – Cambodia
V. Valuation Standards and Applications – Cambodia
VI. Well Recognized Professional and Valuation Standards
VII. Conclusion
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I. Introduction - To Set the Scene…There are growing concerns of financial regulators and stakeholders for betteridentification and communication of uncertainty in valuations
• 2008: The financial Stability Forum (FSF) published an analysis of thecauses and weaknesses that had produced the turmoil in financial marketsasking for more transparency in valuations.
• 2009: the G20 Declaration on Strengthening the financial System called forimproved standards for valuation uncertainty in the context of fair valueaccounting.
• 2009: The Basel Committee for banking supervision issued its paperSupervisory Guidance for Assessing Banks’ Financial Instrument Fair ValuePractice
• 2010: the Financial Services Authority (UK) published recommendations forthe specific assessment of valuation uncertainty.
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Source: RICS Presentation, www.ricseurope.eu
I. Introduction- “Risk in property market crisis can threaten the stability of the whole
financial sector, ” H.E Kim Vada, Director General of Banking Supervision,
National Bank of Cambodia, Presentation on 18th August 2015 at
Cambodiana Hotel
- “(There need to be) a strengthening of professionalism in the valuation
practices,” Kim Vada, National Bank of Cambodia, Presentation, 18th
August 2015.
- “Accurate and professional valuations are vital to a healthy property
market and a stable economy, forming the basis of performance analysis,
financing decisions, transactional or development advice, dispute
resolution and taxation,” Royal Institute of Chartered Surveyors (RICS)
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I. Introduction – Uses of Valuation Services
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2 M
ain
Appl
icat
ions
ofVa
luat
ion
Valuation for FinancialReporting
Valuation for SecuredLending
Others: M&A, Buying,Selling, Renting, Tax
assessment,Insurance
Subjects of Valuation
Real property
Personal property
Business interest
Intangible assets
Plant & equipment
Trade-related property etc.
II. Valuation for Financial Reporting
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Increasing Role of Valuations for Financial Reporting
II. Valuation for Financial Reporting
• The importance of fair value and similar measurements in financial reporting
mandates corresponding high-quality valuations.
• The financial crisis 2007-2008 highlighted the interdependency of the global
financial markets, and the increasingly prominent role that the valuation
profession plays in these markets.
• the valuation profession needs to address questions about the quality,
consistency, and reliability of its valuations, particularly those performed for
financial reporting purposes
• Having a substantive global valuation technical framework that is principles-
based will improve the consistency, better comparability across the financial
markets and increased confidence in the valuations performed.
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PwC Called for Global Valuation Standards
Source: Point of View, Global Valuations Standards, PWC, 2013
III. Valuation for Secured Lending
• A poor or inadequate legal framework that does not allow for the efficient
functioning of the property market.
• The lack of published information or difficulty in obtaining information regarding
transactional as well as other data requisite for proper valuations.
• Greater volatility of property market
• Lack of adequately trained professional valuers
• Outdated National Valuation Standards
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Valuations in emerging markets: Common Characteristics
Source: International Valuation White Paper, International Valuation Standards Committee (IVSC)
III. Valuation for Secured Lending
1. Commercial banks and other lenders must ensure compliance with IVS
application, Valuation for Secured Lending. Valuers must be
independent/External valuers
2. Lending institutions should clearly specify in writing the conditions of
engagement and instructions for the assignment at the outset.
3. Banks and other financial institutions should recognize the importance of
valuations undertaken by professionally qualified valuers who comply with IVS
and this white Paper
4. Institutions with regulatory functions over the valuation profession should
ensure adequate opportunity for its development as this profession is central to
the proper functioning of the property market and by extension the economy.
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Valuations in emerging markets: Recommendations
Source: International Valuation White Paper, International Valuation Standards Committee (IVSC)
III. Valuation for Secured Lending
Primary Weaknesses inValuation Process
Observations Recommendations
1. Weaknesses ininstructions given tovaluers:
Poor valuationinstructions were acontributing factor tothe level of propertylosses incurred byLenders. Valuationsbased on vagueinstructions providedinaccurate values andtherefore inaccurateassessments of risk atthe time of underwriting.
- Banks should standardizeall valuation processes toprovide for consistencyand accurate analysisacross loan portfolio.
- Letters of instructionshould be incorporatedinto the valuation report toensure that the basis andassumptions are asrequired.
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A Case Study: The Central Bank of Ireland, Valuation Processesin the Banking Crisis - Lessons Learned – Guiding the Future,Dec 2012
III. Valuation for Secured Lending
Primary Weaknesses inValuation Process
Observations Recommendations
2. Conflicts of interest: During the volumeled transactionphase of the boomin propertydevelopment,certain valuationpractices wereaccepted by creditinstitutions thatinvolved significantconflict of interest.
- The valuers’ duty of care is tothe banks and should beemphasized by banks in theirwritten instructions.
- Banks should require valuers(or their firm) to disclose anymaterial involvement in aproperty in the valuationreport.
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A Case Study: The Central Bank of Ireland, Valuation Processesin the Banking Crisis - Lessons Learned – Guiding the Future,Dec 2012
III. Valuation for Secured Lending
Primary Weaknesses inValuation Process
Observations Recommendations
2. Conflicts of interest:
(Continue)
During the volumeled transactionphase of the boomin propertydevelopment,certain valuationpractices wereaccepted by creditinstitutions thatinvolved significantconflict of interest.
- Instructions to valuers shouldcome from bank staff who arenot dealing directly with loanclients.
- Fees should only bedischarged by banks.
- Valuation reports shouldalways be addressed and onlydelivered first to the bank thatis advancing the loan funds.
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A Case Study: The Central Bank of Ireland, Valuation Processesin the Banking Crisis - Lessons Learned – Guiding the Future,Dec 2012
III. Valuation for Secured Lending
Primary Weaknesses inValuation Process
Observations Recommendations
3. Valuer panelmanagement:
There were weaknessesin the appointment,utilization andperformance review ofvaluer panels by banks.This included theutilisation of valuerswithout appropriateexperience, qualificationsand professionalindemnity insurance forthe particular assignment.
- Banks should have aproperly approved panelof valuers usingappropriate selectioncriteria.
- It should have on-goingassessment review ofpanel performanceincluding a review ofprofessional indemnityinsurance.
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A Case Study: The Central Bank of Ireland, Valuation Processesin the Banking Crisis - Lessons Learned – Guiding the Future,Dec 2012
III. Valuation for Secured Lending
Primary Weaknesses inValuation Process
Observations Recommendations
3. Valuer panelmanagement:
(continue)
There were weaknessesin the appointment,utilization andperformance review ofvaluer panels by creditinstitutions. This includedthe utilisation of valuerswithout appropriateexperience, qualificationsand professionalindemnity insurance forthe particular assignment.
- Banks should ensurethat no one firm ofvaluers has the bulk oftheir valuations.
- Consideration shouldbe given to having noone valuer doing morethan, say, 33% of allvaluation reports.
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A Case Study: The Central Bank of Ireland, Valuation Processesin the Banking Crisis - Lessons Learned – Guiding the Future,Dec 2012
III. Valuation for Secured Lending
Primary Weaknesses inValuation Process
Observations Recommendations
4. Frequency of valuationreview:
Credit institutionsoften failed toconduct regularvaluations,thereby avoidingthe issue ofrecognizing valuediminutionresulting in under-assessment ofimpairmentprovisions.
- Banks should have clear policyand guidelines governingvaluation frequency, at leastannually.
- Where there has been amaterial change (positive ornegative) to the property by wayof zoning, planning permission,densities, compulsory purchaseorder, transport links, etc. arevised valuation of the propertyshould be sought.
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A Case Study: The Central Bank of Ireland, Valuation Processesin the Banking Crisis - Lessons Learned – Guiding the Future,Dec 2012
III. Valuation for Secured Lending
Primary Weaknesses inValuation Process
Observations Recommendations
5. Inappropriate use ofinformal valuations:
During the propertylending boom, therewas increasedreliance on informalvaluations by creditinstitutions. Thesewere utilised as ifthey were fullvaluations. Toproperly assess riskduring lendingreviews, fullvaluations arerequired.
- Banks should haveappropriate processes inplace to flag out-datedvaluations and to trigger fullre-valuation. This can be inline with appropriate reviewdates for the loan itself.
- Loan templates shouldprovide a summary of the lasttwo valuations and specificallywhen the last full independentvaluation was done with lessprominence to “informalvaluation updates”.
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A Case Study: The Central Bank of Ireland, Valuation Processesin the Banking Crisis - Lessons Learned – Guiding the Future,Dec 2012
Primary Weaknesses inValuation Process
Observations Recommendations
6. Training wasinadequate:
There wasinadequate trainingregarding collateralvaluationmethodologies,interaction withprofessionalvaluers, theinterpretation ofvaluation reportsand the importanceof valuations incredit riskassessment.
- the knowledge gaps invaluations are identified andclosed out through training.
- the Relationship Managersand Credit Risk staff arespecifically trained in propertyvaluation methods andprocesses.
- Banks should consider theestablishment of in-houseexpertise to inform in-housetraining requirements andstandards.
III. Valuation for Secured Lending
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A Case Study: The Central Bank of Ireland, Valuation Processesin the Banking Crisis - Lessons Learned – Guiding the Future,Dec 2012
IV. Property Market and Banking Sector- Cambodia
- GDP growth at 7% in 2014 and estimate at 7% for 2015
- In 2014, Construction sector contributed 17.2% to GDP growth, while real estate
sector contributed about 10.9%.
- The construction and real estate absorb an estimated labor force of about
38,000 to 45,000 workers daily throughout Cambodia, while in Phnom Penh
alone the number is 8,000 to 12,000.
- The growth of the sectors help reduce emigration and push the growth of sub-
sector such as property valuations, management and agency, engineer and
architecture etc.
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Property Market
Source: Presentation by H.E Mey Vann, Director General of Financial Industry Department, MoEF, 17th July 2015
IV. Property Market and Banking Sector- Cambodia
- Factors that have driven the real estate market during the last 5 years includes:
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Property Market
Source: Presentation by National Bank of Cambodia, 17th July 2015
Growthof RealEstateMarket
Risingmiddle-
income class
Growth ofPopulation and
change ofdemographics
FavorableBusiness and
economicenvironment
Growth ofFDIs
Growth ofCredit
Availability
New law onforeign
ownership ofproperty
IV. Property Market and Banking Sector- Cambodia
- Lending has been growing steadily after the financial crisis 2007-2008
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Banking Sector – Loans Outstanding
BalanceOutstanding (US$ in Millions) 2008 2009 2010 2011 2012 2013 2014 June- 2015 2015P
Total Loans 2,409.38 2,512.92 3,226.50 4,377.29 5,947.83 7,469.37 9,530.98 10,676.37 11,959.41
% YoY Change 4.30% 28.40% 35.67% 35.88% 25.58% 27.60% 12.02% 25.48%
Real Estate Sector 545.81 463.55 495.40 739.05 960.97 1,227.34 1,758.05 2,022.14 2,325.89
% YoY Growth -15.07% 6.87% 49.18% 30.03% 27.72% 43.24% 15.02% 32.30%
Of which
Housing 175.50 89.69 116.75 271.40 329.98 398.94 602.50 699.09 811.16
% growth -48.89% 30.17% 132.46% 21.58% 20.90% 51.03% 16.03% 34.63%
Construction 189.61 216.04 227.70 326.05 446.82 577.37 775.28 889.41 1,020.34
% growth 13.94% 5.40% 43.19% 37.04% 29.22% 34.28% 14.72% 31.61%
Others 180.70 158.17 150.59 139.84 183.58 250.53 379.42 433.33 494.90
% growth -12.47% -4.79% -7.14% 31.28% 36.47% 51.45% 14.21% 30.44%
Source: National Bank of Cambodia, Presentation by Kim Vada, 18 August 2015
IV. Property Market and Banking Sector- Cambodia
- High and volatile growth of the property sector
- High non-performing loans (NPL) at 0.25% of the total NPL of 2.66%
- Shadow Banking Operations
- Shortage of long-term capital and liquidity risk
- Relaxed standards of loans underwriting/originations
- Property price overvaluation and speculation
- Lack of data for detailed analysis of the sector
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Banking Sector – Challenges for the Real Estate Sector
Source: Presentation by National Bank of Cambodia, 17th July 2015
V. Valuation Standards and Applications - Cambodia
- Multi standards – no standard at all
- Cambodian Valuation Standards – in Khmer
- Prepared by the Financial Industry Department, Ministry of Economy
and Finance (MoEF)
- Consist of 11 standards, 40 pages, no update and focus only on real
property valuations
- Two legal frameworks by the MoEF regarding valuation practices:
- Prakas on the management of valuation services, real estate agency and
management (modified)
- Laws on the management of valuation services and real estate agency
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Valuation Standards
V. Valuation Standards and Applications - Cambodia
- Cambodian Valuers and Estate Association (CVEA) is working with Asean
Valuation Association (AVA) to promote “One ASEAN, One Valuation
Standard”
- CVEA has signed MoU with its counterparts from Singapore and Malaysia
as well as RICS regarding training in the property sector
- There is no minimum CPD training requirements for valuers
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Valuation Standards
V. Valuation Standards and Applications in Cambodia
- Mostly Valuations for Secured Lending
- The need for valuation for financial reporting is growing gradually as
Cambodia is adopting the IFRSs, with some modifications, for applications
to both listed and unlisted firms
- There are 134 licensed real estate agency and valuation firms, of which
87 are members of CVEA as of February 2016 (source: CVEA)
- There are 70 certified valuers recognized by the MoEF as of August 2015
(source: MoEF)
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Valuation Applications
V. Valuation Standards and Applications in Cambodia
- Only few big valuation firms are able to acquire Professional Indemnity
Insurance
- Current Lending Practices –
- Relaxed Standards of Loan Underwriting (some institutions)
(Presentation by Kim Vada, National Bank of Cambodia, 18th August
2005 at Cambodiana Hotel)
- Valuation for Secured Lending is characterized by weaknesses as
described in the Case Study and the IVS White Paper -valuations in
emerging markets
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Valuation Applications
VI. Well Recognized Professional and Valuation Standards
- RICS was created in 1868 in the United
Kingdom and is the world's leading
professional body for qualifications and
standards in land, property and construction.
- International headquarters in London, with
world regional offices in Brussels, Dubai, Hong
Kong, New York and Sydney
- Over 100,000 qualified members in over 146
countries
- 500 industry research and policy papers
published every year
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The Red Book
VI. Well Recognized Professional and Valuation Standards
• RICS Professional Standards (PS) – Mandatory
• PS1 – Compliance with standards and practice statements where a writtenvaluation is provided.
• PS2 – Ethics, competency, objectivity and disclosures
• RICS Global Valuation Practice Statements (VPS) – Mandatory
• VPS 1 – Minimum terms of engagement; VPS 2 – Inspections and investigations;VPS 3 – Valuation reports; VPS 4 – Bases of value, assumptions and specialassumptions
• Valuation Practice Guidance- Application (VPGA)
• Valuation for Secured Lending and Financial Reporting
• Subjects of valuation include real property, plant and equipment, BusinessValuation, trade-related property, intangible assets, portfolio of properties.
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Outline of the Red Book
VI. Well Recognized Professional and Valuation Standards
• Introduction
• The IVS Framework
• IVS General Standards
• IVS Asset Standards
• IVS Valuation Applications for Financial Reporting
and Secured Lending
• Technical Information Papers on valuations of subject property such as real
property, plant and equipment, Business Valuation, Investment property
under construction, trade-related property, intangible assets, financial
Instruments,
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Outline of The White Book (IVS)
V. Conclusion• The growth of property and financial sectors as well as the increasing numbers
of valuation practicing firms call for the discipline and professionalism in
valuation practices
• The introduction and implementation of sound valuation standards are essential
to the consolidation, sustainability, transparency, efficiency of property and
financial markets in Cambodia.
• Cambodia needs professional standards that can:
• Protect clients and consumers through a strict code of ethics
• Provide impartial advice, analysis and guidance to valuers
• Ensure quality of valuations and creditability of valuers
• Provide consistency and comparability across markets
• Cover beyond real property
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V. Conclusion• Policy makers may need an updated local standards, incorporating
internationally recognized ones such as The Red Book or The White Book
or completely adopt the books with minimal modifications like the case of
Cambodian accounting standards
• The regulators, in collaboration with CVEA, should develop appropriate
regulations for full implementation of the adopted standards which should
cover valuation practices beyond property
• Publicly accessible central market database should be initiated
• CVEA needs to be entrusted with more membership regulatory authority
in maintaining the highest educational and professional standards
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V. Conclusion• CVEA and the Ministry should work in continually upgrading valuer’s
knowledge through minimum hours CPD requirements
• CVEA and the regulators should encourage more valuation training
courses in schools, universities, associations.
• Banks and other lending institutions should enforce the best practices
valuations for secured lending.
• In addition, banks, especially local banks, should consider the best
practices recommendations set out in the case study in order to improve
its loan origination or underwriting and risk management process.
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Thank You !About Vtrust Appraisal Co., Ltd:
- Real Property Valuations
- Plant, Machinery & Equipment
- Business Valuation
- Hotel Valuation
- Pre-IPO Valuation
- Research & Consultancy - Real Estate Projects
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