Valuation Principles and Applied Valuation
This domain tests the ability to select a basis and method, apply it defensibly and report it to Malaysian Valuation Standards. Expect market value definitions, the main approaches and report content.
Bases and standards
Market value is the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arm's-length transaction, after proper marketing, with each acting knowledgeably, prudently and without compulsion. Other bases include market rent, investment value, fair value under MFRS 13, forced sale and liquidation. The report must state the purpose, basis, date, tenure, method, assumptions and any departure from the standards.
Methods
Comparison adjusts comparable evidence for time, location, size, tenure, condition and facilities. The income approach capitalises net operating income at a market-derived yield; discounted cash flow is used for developments and uneven cash flows. The cost approach is replacement cost less depreciation plus land. The residual method deducts development costs and developer's profit from gross development value. The profits method suits hotels and petrol stations.
Worked example
A shop office produces a net rent of RM120,000 a year after outgoings. Recent sales show net yields of 6.5%. Value = 120,000 / 0.065 = RM1,846,154, say RM1.85 million. The valuer then checks the figure against comparison evidence and considers whether the rent is at market and whether the lease is short. Reasoning: capitalising net income, not gross rent, avoids double-counting outgoings and reflects the return investors require.
Traps
- Capitalising gross rent with a net yield.
- Deducting outgoings twice.
- Using a yield from a different sector or tenure.
- Giving a single point value with no market evidence or sensitivity.