1. QUALITY OF VALUATION REPORT IN MALAYSIA MUHAMMAD NAJIB RAZALI (mnajibmr@utm.my)mnajibmr@utm.my Universiti Teknologi Malaysia (UTM) DAVID MARTIN JUANIL Universiti Tun Hussein Onn Malaysia (UTHM) GRAEME NEWELL University of Western Sydney, Australia (UWS) INSPIRING CREATIVE AND INNOVATIVE MINDS

2. 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. INSPIRING CREATIVE AND INNOVATIVE MINDS

3. 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 INSPIRING CREATIVE AND INNOVATIVE MINDS Objectives

4. 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). INSPIRING CREATIVE AND INNOVATIVE MINDS Research Problems

5. 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.

6. 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. INSPIRING CREATIVE AND INNOVATIVE MINDS Valuation Report

7. INSPIRING CREATIVE AND INNOVATIVE MINDS 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.

8. INSPIRING CREATIVE AND INNOVATIVE MINDS 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: REITs16.4% Insurance companies19.2% Property developers15.1% Corporates12.3% Pension funds11.0% Commercial banks1.4% Others24.6% Survey Respondents Profile

9. INSPIRING CREATIVE AND INNOVATIVE MINDS Commercial property portfolios of survey respondents Total value of commercial property portfolio : RM15.51 billion Make-up of commercial property portfolio (by organization) REITsRM 4.41 billion (28.4%) CorporatesRM 2.37 billion (15.3%) Pension fundsRM 2.11 billion (13.6%) Property developersRM 1.84 billion (11.9%) Insurance companiesRM 1.43 billion (9.2%) Commercial banksRM 0.09 billion (0.6%) OtherRM 3.27 billion (21.1%) Make-up commercial property portfolio (by size of portfolio) < RM 20M31.5% RM 20-49 M19.2% RM 50 – 99M9.6% RM 100 – 499 M17.8% > RM 500 M21.9%

10. INSPIRING CREATIVE AND INNOVATIVE MINDS Coverage size of commercial property portfolios

11. INSPIRING CREATIVE AND INNOVATIVE MINDS Extent of importance of purpose for using commercial valuation reports PurposePercentage responding at least ‘important’ OverallREITInsurance Companies Property Developers <20M20- 49M 50- 99M 100- 499M >500M Investment decisions95.9%83%100% 86%100% 94% Lending practices90.4%83%86%93%87%79%100% 94% Legal requirements90.4%83%100%86%91%79%100%92%94% Property transactions86.3%92%79%71%83%86%71%85%100% Accounting/ auditing71.3%92%79%57%61%79%71%69%81%

12. INSPIRING CREATIVE AND INNOVATIVE MINDS Selection of outside valuers Percentage of respondents using procedure* ProcedureOverallREITInsurance Companies Property Developers <20M20- 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% 31%38% Request tenders23%25%7%29%30%21%14%15%25%

13. INSPIRING CREATIVE AND INNOVATIVE MINDS Extent of significant difference in commercial valuation reports Percentage responding ‘significant differences’ FactorOverallREITInsurance Companies Property Developers <20M20- 49M 50- 99M 100- 499M >500M Accuracy of facts and data37%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 report28.8%42%14%21%13%36%43%31%38% Reliability of evidence and market value 24.7%25%21% 26%7%14%54%19%

14. INSPIRING CREATIVE AND INNOVATIVE MINDS Valuation methods used in commercial valuation reports Percentage usage valuation methods Valuation methodsOverallREITInsurance Companies Property Developers <20M20-49M50-99M100- 499M >500M Office property Income Approach34% 35%36%30%39%24%29%31% DCF Analysis28%27%29%25%29%30%31%32%38% Comparable Sales24%25% 22%23% 28%25%24% Cost Approach14%15%12%16%14%13% 14%12% Retail property Income Approach32%39%29%56%22%28%19%26%20% DCF Analysis31%25%42%27%34%27%24%35%37% Comparable Sales31%23% 26%11%10% 13% 9% Cost Approach14% 9%14%34%31%35%27% Industrial property Income Approach32%34%33%29%24%20%24%22%20% DCF Analysis33%35%36%35%32%40%28%34%37% Comparable Sales13%20% 25%13% 11% Cost Approach22%11%12%11%30%41%39%30%32%

15. INSPIRING CREATIVE AND INNOVATIVE MINDS Percentage responding at least ‘satisfied’ Property sectorsOverallREITInsurance Companies Property Developers <20M20- 49M 50- 99M 100- 499M >500M Office property72.6%67%71%79%65%86% 85%56% Retail property84.9%75%86%79%91%79%86%77%87% Industrial property86.3%83%86% 83%100%86%96%94% Other investment property86.3%83%93%86%96%71%86%77%94% Extent of satisfaction with quality of commercial valuation reports Percentage of valuations considered reliable FactorOverallREITInsurance Companies Property Developers <20M20- 49M 50- 99M 100- 499M >500M Content of valuation reports57%48%55%57%60%54%50%59%56% Estimate of market value57%52%61%53%58%61%54%55%58% Timing of report delivery54%53%57%51%53%51%63%54%56% Reliability of commercial property valuations

16. 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.

17. 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

18. Ranking of suggested solutions to perceived valuation report weaknesses (by organisation) Rank of suggested solution Suggested solutionsOverall rank of perceived weakness REITInsurance Companies Property developers More detailed valuation workings1425 More use of analytical techniques2141 Comply with Malaysian Valuation Standards/ Securities Commission guidelines 2141 More clarity in purpose of commercial property valuation reports 2141 Greater emphasis on commercial property market supply/demand situation 5441 Allow reasonable time period for delivery of commercial property valuation report 6618 Improve accuracy of facts/data in valuation reports7837 Reasonable number of years of experience of registered valuers 8686

19. Percentage responding ‘highly important’ Overall<20M20-49M50-99M100-499M>500M More detailed valuation workings113155 More use of analytical techniques215321 Comply with Malaysian Valuation Standards/ Securities Commission guidelines 215321 More clarity in purpose of commercial property valuation reports 215321 Greater emphasis on commercial property market supply/demand situation 515324 Allow reasonable time period for delivery at commercial property valuation report 674866 Improve accuracy of facts/data in valuation reports 762777 Reasonable number of years of experience of registered valuer 881188 Ranking suggested solutions to perceived valuation report weaknesses (by size of portfolio)

20. Panel A: Organisation type REITsInsurance companies Property developers REITs1.00 Insurance companies 0.001.00 Property developers 0.900.001.00 Panel B: Size of portfolios (RM) <20M20-49M50-99M100-499M>500M <20M1.00 20-49M0.001.00 50-99M0.340.291.00 100-499M0.920.000.401.00 >500M0.880.000.080.731.00 Rank correlations between suggested solutions

21. 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.

22. 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.