The value of valuation

By DR ERNEST CHEONG

BEHIND THE SCENES: Dr Ernest lifts the veil off the quiet valuer profession which
has a bigger impact on the property market than meets the eye.
For many adult Malaysians, at some
point in their journey towards
achieving their life-long ambition of
buying and owning a property, be it
for investment or self-occupation,
whether it is a house, condominium,
apartment or shop, they will require
the services of a valuer.

Who is a valuer? What does a valuer do? Why do I need the services of a
valuer? To find satisfactory answers to these questions, let us follow the
activities of Ahmad bin Abdullah, an average Malaysian.

Ahmad is married with two children. He lives with his family in a rented terrace
house in Petaling Jaya, Selangor. Ahmad and his wife both work, he with an
international courier company and she with a Malaysian bank. Their monthly
combined take-home pay (after EPF and tax deductions) is RM5,000. Like
most Malaysian families, Ahmad and his wife aspire to buy their own home.

In my previous article on the topic The Malaysian Property Dilemma (NST
RED 6th July 2012), I examined the finances of three Malaysian Families,
namely the High Income Family (RM14,000 monthly income), Middle Income
Family (RM8,000 monthly income) and Low Income Family (RM3,000 monthly
income). I found that these Malaysian Families can only afford to spend
monthly RM2,960 (High Income Family), RM1,720 (Middle Income Family) and
RM520 (Low Income Family) for their respective housing loans.

Ahmad and his family, with a monthly family income of RM5,000 may be
considered a Lower-Middle Income Family. In keeping with the basis I
adopted in my article The Malaysian Property Dilemma, Ahmad and his
wife can only afford to spend RM1,100 every month to pay for his housing
loan that enables him to obtain a RM180,000 housing loan (repayable in 30
years). With a RM180,000 housing loan that represents 90 per cent of the
purchase price, Ahmad will be looking to buy a RM200,000 apartment in
Petaling Jaya.
Armed with that information, Ahmad and his wife went house-hunting.
Ahmads efforts were complicated by the current high expectations of Sellers
(often on the advice of Real Estate Agents) vis--vis the prices the Sellers
want for their properties. Ahmad and his wife found an apartment in Section
17, Petaling Jaya with an initial asking price of RM250,000. After much
negotiations the Seller was willing to sell the apartment for RM230,000. Ahmad
agreed to buy the apartment at RM230,000 and paid the Seller a 3 per cent
Earnest Deposit amounting to RM6,900 and signed a Letter of Intent with the
Seller.

Armed with the Letter of Intent he signed with the Seller, Ahmad went to his
regular bank to apply for a housing loan. After all the initial formalities are
completed, the bank officer tells Ahmad that it is the banks policy to have
the property Ahmad intends to purchase to be valued by a valuer on the
banks panel of valuers. The bank officer also tells Ahmad that the valuers
professional fees would have to be paid for by Ahmad in advance.

At that point in time, Ahmad remembers that Zulkifli, his buddy from his high
school days is a registered valuer and so he requested that Zulkiflis firm be
appointed to value the apartment he intends to purchase. The bank officer
politely told Ahmad that his request could not be granted because Zulkiflis
firm is not on the Banks panel of valuers.

Lower bank valuation: Ahmad reluctantly agreed for the bank officer to
appoint a valuer that is on the banks panel of valuers to value the
apartment he intends to buy. The Bank Officer also requested that Ahmad
pays him the valuation fees and he would forward the valuation fees to the
appointed valuer.

About a week later, the bank officer calls Ahmad and tells him the valuer has
submitted to the bank his Valuation Report and has valued the apartment at
RM190, 000. The bank officer tells Ahmad that at 90 per cent of the valuation,
the bank can only grant Ahmad a RM171, 000 housing loan.

Ahmad is now in a quandary about what to do next. He had agreed to buy
the apartment for RM230, 000. With the Bank willing to lend him only
RM171,000, Ahmad will have to pay the difference between the RM230,000
agreed purchase price and the RM171,000 loan sum amounting to RM59,000.
He can only afford to pay an initial deposit of RM23, 000 or 10 per cent of the
RM230, 000 purchase price. He now has to raise an additional RM36, 000
money he does not have.

Ahmad and his wife will now have to make very hard choices. They can
decide to forego and walk away from their obligations to the Seller per the
Letter of Intent, whereupon Ahmad will lose the RM6, 900 earnest payment
deposit he had already paid the Seller. Alternatively, they can try to raise the
additional RM36, 000 money he does not have by borrowing from friends and
relatives.

Both of these are not pleasant options. The dilemma now confronting Ahmad
and his wife is not unique to them. There are tens of thousands of Malaysian
families like Ahmads who also faced the same dilemma.

Five big questions Malaysian borrowers ask: This dilemma of Ahmad brings to
the fore some very interesting commercial and ethical questions that
members of the public like Ahmad have been asking since many years ago:

1. Why would the Bank still want to have the property I intend to buy be
valued by a valuer when the Seller and I have already agreed on the
purchase price?

2. If indeed it is the banks policy to have the property I intend to buy
valued, why must it be valued by a valuer on the banks panel of
valuers?

3. Can I appoint a valuer of my choice as long as he is a qualified
registered valuer since I am going to be the one who pays the valuers
professional fees?

4. After the banks panel valuer has completed his Valuation Report and I
am not happy with the value, do I have the right to appoint a valuer of
my choice to prepare a separate Valuation Report to challenge the
Bank valuers Valuation Report?

5. How is it possible that when two or more valuers are instructed to value
the same property at the same time, they produce separate Valuation
Reports with the subject propertys value vastly different and the
variation can range from 30 per cent to three or four times between
the lowest and highest value?

What is property valuation? Property valuation is neither a science nor an art.
It is, if you like to put a label on property valuation, part science and part art.
The science part of property valuation involves technical surveys and
investigative work that a property valuer has to do to get all the information
he needs to have an understanding of the physical and other related
characteristics of the property to be valued.

The art part of property valuation involves his skill and experience as a
property valuer and how he interprets and analyses all the information he has
on the physical and other related characteristics of the property, as well as
information he procured on prices recently paid by purchasers of properties
in the vicinity of the subject property to be valued, that ultimately leads him
to form his considered professional opinion on the market value of the
property he is valuing.

Property valuation is a profession like the profession of architecture and
engineering or the medical or legal professions.

Malaysian valuation profession: In Malaysia, the property valuation profession
is regulated by an Act of Parliament, namely the Valuers, Appraisers and
Estate Agents Act 1981 (the Act). To practise as a valuer in Malaysia, a person
must first posses the required academic and professional qualifications
specified in the Act. After having acquired the required qualifications, the
candidate must then apply to be registered with the Board of Valuers,
Appraisers and Estate Agents Malaysia (the Board) to be a Probationary
Valuer and to work with a registered valuer who shall be his Master for two
years.

After having completed his two years of Practical Training the candidate
must then subject himself to a Test of Professional Competency before a
Panel of the Board. If he passes the test, the candidate will then be issued
with a licence by the Board to practise as a Registered Valuer in Malaysia.
In Malaysia, the Registered Valuer is licensed and authorised to carry out
property valuations and plant and machinery valuations. On the contrary, in
the United Kingdom, Australia and the USA, a plant and machinery valuer is
separately trained and accredited from a property valuer. Property valuation
and plant and machinery valuation are treated as two separate disciplines in
these countries given that the valuation of plant and machinery is a highly
specialised field of study that requires distinct and specialised methods to
carry out these valuations.

Property valuation profession overseas: Professional practice of property
valuation in Commonwealth countries is essentially similar except that in the
United Kingdom, valuers are usually referred to as Surveyors or more
correctly General Practice Surveyors. After these valuers (Surveyors)
become accredited members of the Royal Institution of Chartered Surveyors
(RICS) which is an international professional body based in the United
Kingdom, they may then call themselves Chartered Surveyors.

In Australia, Singapore and Malaysia, the terminology is similar wherein valuers
are typically known as property valuers too. However, in the USA, the term
Appraiser is more often used instead of Valuer.

What is market value? Market value is the main focus of most Real Property
Valuation Assignments, where valuers are engaged to develop an estimate
of the Market Value of the property in question.
The definition of Market Value as adopted by the Board of Valuers,
Appraisers and Estate Agents, Malaysia is as follows:

Market value is the estimated amount for which an asset should exchange
on the date of valuation between a willing buyer and a willing seller in an
arms length transaction after proper marketing wherein the parties had
each acted knowledgeably, prudently and without compulsion.

What is a valuers job? A valuers job is to assess the market value of the land
(including the building) and all interests bestowed in and on the land at a
particular point in time subject to all easements. A valuer does not create
or determine value. Valuers do not pull values out of the air, they read and
interpret market sale evidences and accordingly assess the value of the
property.

The valuation process: The valuation process in its simplest form may be
outlined below as an analytical process not only followed by property
valuers, but also by experienced individuals or investors when they are
looking at properties to invest, occupy or speculate:

1. Identify and define the property (or Real Estate) to be valued.
2. Identify the particular right or interest to be valued, namely whether to
value the freehold interest or the leasehold interest or the sub-lessee
interest or the tenants interest.
3. The date of the valuation. (This is especially crucial in Land Acquisition
proceedings, as the compensation to be paid for the Land that is
compulsorily acquired (taken by force of law) is the value of the land
as at the date of the publication in the Government Gazette that the
land is to be compulsorily acquired. It is also important to note when
valuing a property that is the subject of litigation proceedings, the date
of the valuation is not the date of the valuers appointment, rather it is
the date when the cause of action arose, usually many years ago.)
4. The purpose and objective of the valuation exercise and the type of
value sought need to be clearly defined. In most cases, it is the market
value of the property, as defined above, that is required. There are
instances when the Insurance Value of the Building or the Value of
the Business within the property is required.
5. The appropriate method of valuation should be chosen and adopted
by the valuer for the specific purpose, objective and type of value
specified by the client for the property to be valued.
6. The valuer should clearly state in his Valuation Report the Limiting
Conditions, if any, that his valuation of the property is subjected to.

Answers to borrowers questions
I will attempt to answer the five questions commonly asked by Malaysian
borrowers as listed below:
1. Why would the bank still want to have the property I intend to buy to be
valued by a valuer when the seller and I have already agreed on the
purchase price?
Whilst the bank accepts that the borrower and the seller have agreed
on the purchase price, because it is the banks money that would be
at risk if sometime into the future, the borrower falls on hard times, the
housing loan granted to the borrower turns bad and the bank has to
sell the property by way of Public Auction to recover its money, the
bank would want to make sure that it is not lending more money than it
should by having the banks panel valuer advise the bank on the fair
and correct market value of the property at the time when the housing
loan is granted.

2. If indeed it is the banks policy to have the property I intend to buy
valued, why must it be valued by a valuer on the banks panel of
valuers?
When a valuer submits his valuation report to the bank, he is essentially
saying to the bank Here is my professional opinion on the open market
value of the property. Please trust my professional judgment. Banks in
malaysia generally would want to work with professional advisers,
including lawyers and valuers that they are comfortable with especially
when the banks are asked to lend and release millions of the banks
money on the professional advice of the lawyers and valuers. The
panel valuer system is created by the banks to ensure that only valuers
that the banks are comfortable with are appointed on the banks
panel of valuers and the banks will generally only accept their
valuation reports. There are however exceptions to this general rule. It
would be up to the individual bank to exercise its discretion on when to
make an exception.

Is it fair for the banks to discriminate against other valuers that are
equally if not more qualified than some of the valuers on the banks
panel of valuers?

I will leave it to the Board of Valuers, Appraisers and Estate Agents,
Malaysia and Bank Negara Malaysia to answer this question. The board
is the licensing and regulatory body for all registered valuers in Malaysia
and all valuers on Malaysian banks panel of valuers are also registered
valuers under the supervision of the board. Bank Negara Malaysia is the
licensing and regulatory body for all commercial and investment banks
in Malaysia.

3. Can I appoint a valuer of my choice as long as he is a qualified
registered valuer since I am going to be the one who pays the valuers
professional fees?
Unfortunately, when your individual business is small and insignificant to
the bank, you will not be able to appoint a valuer of your choice even
when that valuer is very competent and a highly skilled senior member
of his profession for as long as his firm is not on the panel of valuers of
the bank. However, if you and/or your company is the banks valued
customer and your potential business for the bank is worth millions of
ringgit, the bank will likely exercise its discretion to waive the general
rule and let you appoint a valuer of your choice.

You will then ask the question that many Malaysians have been asking
Why are big and rich customers of the banks treated differently from
the small insignificant borrower like me?
This is a rhetorical question. Like other similar rhetorical questions being
asked all over the world, no answer is expected from the banks.

4. After the banks panel valuer has completed his valuation report and I
am not happy with the value, do i have the right to appoint a valuer of
my choice to prepare a separate valuation report to challenge the
banks valuers valuation report?
As an individual and a member of the public, you have the right to
challenge any professional opinion of a valuer vis--vis the fair market
value of your property or the fair market value of the property you
intend to purchase.
However, in respect of the opinion of a valuer who is on the panel of
valuers of the bank, if you were to exercise your right to challenge the
valuers opinion of value, you will likely jeopardise your chances of
getting a loan from the bank.
The bank would not argue with you. They will just withdraw their loan
offer to you without giving you any reason. It is their right and
prerogative to do so. Where will that leave you?

5. How is it possible that when two or more valuers are instructed at the
same time to value the same property that they can produce separate
valuation reports with the subject propertys value vastly different and
the variations can range from 30 per cent to 300 or 400 per cent
between the lowest value and the highest value (at the higher range)?
As I said earlier in this article, the purpose and objective of the
valuation exercise and the type of value sought will influence the
appropriate method of valuation chosen and adopted by the valuer
for the property to be valued.

When two or three valuers are instructed at the same time to value the
same detached house in Damansara Heights, Kuala Lumpur, they are
not likely to defer much in their respective valuation of the property.
They will likely adopt the same method, namely the direct comparison
method, for the valuation of the house.

However, when these two or three valuers are instructed at the same
time to value a 50-acre plot of vacant land in Kajang, Selangor, these
valuers will likely produce valuation reports with vast differences in their
respective opinions of value for this land ranging in their differences
from 50 per cent between the lowest value and the highest value (at
the lower range) to even 400 per cent between the lowest value and
the highest value (at the higher range). In absolute figures, Valuer A
may value it at RM10 million while Valuer B may value it at RM15 million
or even RM40 million.

Can either of the valuers be wrong or can they both be wrong? It is a
paradox. The two valuers may both be right! It depends on the basis
and assumption of facts and the method of valuation that they each
adopt.
Valuer A may assume that the 50-acre plot of vacant land is suitable
only for agriculture use with no potential for any form of development
and therefore he adopts the direct comparison method to value this
property purely as a plot of agriculture land.

On the other hand, Valuer B assumes that the plot of vacant land in
Kajang, Selangor has potential for residential development although it
is currently vacant. He therefore adopts the residual method to value
this property to reflect the propertys potential for residential
development.

The resultant values of the property produced by Valuer A and Valuer
B will show a vast difference with the valuation of Valuer B ranging from
50 to 400 per cent higher than the valuation of valuer A.

Dr. Ernest Y Y Cheong is a Chartered Surveyor, Registered Valuer, Auctioneer, Arbitrator
and Principal of Ernest Cheong PTL Chartered Surveyors.












Valued perspectives
By KHAIRUL KHALID

VALUABLE: Even though a professional valuers role in the property industry is all-
encompassing, it is not always easily understood by the layman. We talk to Datuk
Mani Usilappan, the former Deputy Director General of Jabatan Penilaian &
Perkhidmatan Harta for his views on issues affecting the profession

Mani ... government must review and strategise
Bumiputra discounts.












Property valuers provide services in a few key areas. Firstly, in the public sector they
carry out government-based valuations, mainly for statutory purposes. These include
valuations for taxes, stamp duty, compulsory land acquisition and other property-
related areas. They also provide consultancy to government agencies on any
matters regarding real estate.

Valuers also provide various services to the private sector. For example, in the
banking industry they provide valuing services for loan collaterals. Other areas that
may require valuation include buying, selling and renting of properties, feasibility
studies, investments and any purpose for which a land owner may require valuation.
Even commercial and retail businesses could engage a valuer. For example, a food-
retail giant such as McDonalds may engage valuers to look for potential new sites
for their outlets and managing rental agreements. Any organisation requiring
expertise on where to locate, how much space they should occupy, what terms
should go into their tenancy agreement, whether to buy or rent and negotiations on
price would normally engage in the specialty services of a valuer.

Methods of valuing: Value is a word that has different meaning to different people.
Professional valuers normally view market value, which is determined by an
international definition that the Malaysian Valuation Standards has adopted:
Market value is the estimated amount for which an asset should exchange on the
date of valuation between a willing buyer and a willing seller in an arms length
transaction after proper marketing, wherein each party had each acted
knowledgeably, prudently and without compulsion. The valuation process involves
a series of data collection and analysis such as legal, planning, physical,
environmental and neighbourhood data of a property.

There are three fundamental methods to determine a valuation:
Market approach looks at what other people are paying for the
property.
Cost approach how much it costs to build the property.
Income approach based on income streams.

Assuming that valuers have access to critical database and information such as
sales transaction records of similar properties, this process could typically take up to
a week to complete.

No single factor affects a propertys value.

The property market is a sub-market of the local economy. If the national economy
is growing, it will highly likely correlate in the property market.

Other external factors include population growth and movement, marriageable
age, demographics, earning base and capacity, transportation, physical aspects of
land, amenities, institutional and social factors.

Comparing local and international valuers: All valuers are professionally trained in
property management and estate agency, as well as valuation methods. In the UK,
there are approximately 50,00060,000 valuers for an estimated population of about
65 million. In Malaysia, we have only about 4,000 qualified valuers (i.e. those who
have graduated with a degree in valuation) and 1,000 registered valuers (those who
are actually licensed for practice) for a population of approximately 28 million. In
terms of business penetration and involvement, local valuers still have a long way to
go.

Trends, issues and challenges: Almost all property transactions are captured by
Jabatan Penilaian & Perkhidmatan Harta (JPPH) and disseminated to the public, as
and when required for a small fee. Unfortunately, other real estate-related info such
as taxation, title particulars, planning and site developments are not as readily
available. They are not computerised and available at the click of the button. The
government needs to improve the availability and quality of real estate information.

A lot of questions have also been asked about the true value of Bumiputra discounts
in the property market. In principle, the discount was to encourage Bumiputras to
buy affordable properties, for instance low-end houses and medium cost housing.

The concern is that it is being applied even to high-end housing and benefits those
who dont really need the discounts. The government must review and strategise this
discount factor so that it will really benefit those who really need affordable housing.

Most banks insist on property valuations being conducted by their panel of valuers.
This raises the concern of why a bank should prefer the valuation by one firm instead
of the other. Their priority should be integrity, credibility and professional experience
of the valuers. There is also the issue of price undercutting among some valuers. This
may lead to difficulties in providing quality valuation.
Evaluating valuers
By KHAIRIE HISYAM ALIMAN

ADDING VALUE: NST RED talks to Sr Adzman Shah Mohd Ariffin, current Chairman of
the Property Management, Valuation and Estate Agency Division of the Royal
Institution of Surveyors Malaysia to explore the wide-ranging roles of valuers


The word surveyor is commonly used in various professions, ranging from quantity
surveyors to land surveyors and even marine surveyor. To the average person, there
seems little to distinguish one from the other.

Yet different types of surveyors undertake vastly different tasks and responsibilities.
According to Adzman, valuers fall into a category known as property surveyors.
Property surveyors are further divided into different areas of specialisation
depending on which area one wishes to pursue.

Under the Valuers, Appraisers and Estate Agents Act 1981, we are allowed to
practise in three different areas, namely property management, property valuation,
and estate agency buying and selling properties, explains Adzman, offering that
most of the time this means valuers undertake multiple roles for clients, from
providing property valuation services to managing properties and negotiating on
the clients behalf.

Invaluable expertise: In addition to determining the values of properties for various
uses, valuers also undertake other types of valuation. Public-listed companies also
need valuers to prepare professional reports for submission to the Securities
Commission on the value of its assets. Ultimately this will reflect the value of the
shares and of the company itself, says Adzman, adding that valuers also provide
expertise beyond valuation.
We are also property consultants. For example if a landowner wants to know what
he can do with his land, he can engage a valuer to come up with proposals for the
land. To do that, the valuer will do a market study, explains Adzman, who is a
chartered surveyor.

According to Adzman, the market study will provide information to the valuer on the
location and its surroundings, for instance accessibility and demographics. With that
information, the valuer will then look at the planning provisions governing the
development of the area to ensure the proposed development is in compliance.

We cannot develop in contra with the provisions. For example, if an area is zoned
for housing, we cannot go with an industrial development, says Adzman.

So the valuer will have to determine the optimal land use based on what the local
authority allows to be developed in terms feasibility, development cost and
projected profits for the best return. If the project is bankable, the client will go into
further detail. So valuers are one-stop centres for property solutions because we can
be involved every step of the way, stresses Adzman.

Strict regulations: The depth of expertise offered by professional valuers means much
of the decision-making on property relies heavily on their advice despite a general
lack of awareness of this fact. Apparently in Malaysia, the standards set for valuers
are higher.

Its stricter in Malaysia, reveals Adzman, comparing local regulations to
international standards.

In addition to the Royal Institution of Surveyors Malaysia, we are also regulated by
the Board of Valuers, Appraisers and Estate Agents Malaysia. The board, set up in
1981 and governed by the Valuers, Appraisers and Estate Agents Act 1981, issues
practising licenses as part of its regulation of the practice.

While other countries have associations coming up with their own rules and
regulations, we in Malaysia are governed by Act of Parliament.

So in Malaysia the public is more protected, explains Adzman.

In light of the regulations, a valuer must strive to meet high standards every time,
because if we fail our fiduciary duties and commit negligence, we are actually
open to all sorts of legal action. For instance if a property is auctioned, the reserve
price will of course be based on the valuation report. If it falls below the valuation,
the valuer will be taken to task, notes Adzman, adding that the liability risk means
professional valuers need to invest in professional indemnity insurance, of which the
typical coverage is about RM5 million.
Property managers: Strict regulations coupled with liability exposure means
professional valuers charge higher fees than unlicensed practitioners.

For valuers, especially those opting to specialise in property management, this
presents a huge challenge.

Property managers in particular are having a tough time being recognised as
professionals, because there are a lot of people out there claiming they can do
better based on the fact that they have experience yet without license or degree in
property management, says Adzman, adding that they are usually building owners,
developers and others who have been involved in building management. Because
of this challenge, property managers have to work harder to show value in getting
appointed. Explaining further on the value of certification and licensing, Adzman
points out that property managers are not only governed by the Valuers, Appraisers
and Estate Agents Act but are also subject to the Malaysian Property Management
Standards (MPMS). Introduced by the Board of Valuers, Appraisers and Estate
Agents Malaysia and effective 1 June 2010, MPMS has ten standards ranging from
the role of property managers to financial management on behalf of owners.

MPMS is like a holy scripture to property managers, jokes Adzman, before adding
on a more serious note that it is tough to adhere to all the standards in addition to
getting professional indemnity. In view of the strict standards and regulations,
Adzman stresses that the public would be welladvised to steer clear of unregistered
practitioners for their own protection. While licensed practitioners may lose
everything if they get into trouble, those who are unlicensed look at things
differently.

They can offer lower prices than licensed professionals, but if something happens
they can walk away or disappear, warns Adzman. In fact, a lot of these illegal
property management practitioners run off with their clients money.

Continuous vigilance: To further protect the public from irresponsible parties, the
Building and Common Property (Management and Maintenance) Act 2007 came
into being in 2007. The Act introduced the role of Commissioner of Buildings, who
monitors property managers who carry out work with strata property. Despite the
already strict regulations ensuring the publics safety, more protection is in the works.
This year, the new Strata Management Bill is set to be tabled in Parliament. As part of
the drafting committee, Adzman reveals that the Bill combines the Strata Titles Act
1985 with the Building and Common Property (Management and Maintenance) Act
2007 in terms of property management practices.

If approved, that Act will put a lot of pressure on licensed practitioners for
compliance, says Adzman, summarising that all in all, our roles and responsibilities
are extensive every practitioner must understand his duty of care and fiduciary
duty as a professional. In light of the stricter standards governing professional
valuers, it makes sense to engage licensed and registered practitioners to ensure
your rights are protected. Doing otherwise exposes you to unnecessary risk as
unlicensed practitioners are not subject to the same scrutiny as licensed
professionals.