Monday, 19 October 2015

Ernest Cheong Seminar - Fundamental Principles of Property Valuation





Property Valuation is a Profession. It is part Science and part Art.


The Science of Property Valuation involves technical surveys and investigative work that a Property Valuer carries out to get the information he needs to understand the physical and related characteristics of the property to be valued.

The Art of Property Valuation involves the Property Valuer's experience and his skills when he analyzes and interprets the information including prices recently paid for similar properties in the vicinity that ultimately leads him to form his "Considered Professional Opinion" on the Subject Property's Market Value.

What is Market Value ?


Market Value is the main focus of most Property Valuation Assignments. 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 arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion."

More information 


For more information on "Fundamental Principles of Property Valuation", please refer to attached Seminar Brochure







Thank you

Regards,
ERNEST CHEONG PTL CHARTERED SURVEYORS
Tel: 03-7980 4512, Fax: 03-7980 4519, Web/Mail: www.ecptl.com, seminar@ecptl.com

Wednesday, 15 January 2014

Stigmatized Properties Social Taboos You Cannot Ignore

People all over the World, whether they belong to primitive tribes in Africa or they are 
modern urbanites living in Singapore and Japan embrace religion in one form or another 
and they generally believe in magic in its many forms and manifestations. 

Whether they are members of modern Societies like those in some European Countries
or whether they are members of relatively less advanced Societies like in some South East Asian 
Countries, magic and taboo are resorted to when through the normal use of science or rational 
techniques, man is unable to control unpredictable and uncontrollable events that are important 
to him.

Where there is difficulty in predicting the outcome of behaviour, where the results of actions are not 
harmonious with efforts, where there are great limitations on man's knowledge of vital issues 
and where circumstances of life are uncertain, uncontrolled and unknown, magical techniques are 
employed. Magic and animism, to the practitioners, are systems of thought which give not only the 
explanation of a single phenomenon, but make it possible for practitioners to comprehend the 
totality of the World from one point, as a continuity.

Malaysia is a multi-racial, multi-cultural and multi-religious Society with the three main races, Malay, 
Chinese and Indian constituting more that 80% of the National Population,. The minority 
Eurasian and the Indigenous people of Sabah and Sarawak form the balance of the 
approximately 28 Million population of Malaysia. 

All the races and communities in Malaysia have their own sets of taboos and beliefs and their 
respective systems of thought which give not only the explanation of a single phenomenon, 
but make it possible for each one of the races to comprehend the totality of their world 
from one point, as a continuity. 

The Malay Community, for example have the following taboos:

·        Do not point finger towards the rainbow, with the consequences your finger 
      will be crippled

·        do not sit on the pillow, lest infected boils around the anus

·        do not open an umbrella in the house, lest the snake will enter the house

·        girls who are not married can not sing in the kitchen, for fear marriage  would be delayed

The Chinese too have their own taboos, and they run like this:

·        Odd numbers are thought to be unfortunate: so wedding and birthday gifts 
       for the aged are always sent in pairs

·        though ‘four’ is an even number, it sounds like death in Chinese thus 
      it is avoided (four is pronounced similar in sound to the word for death)

·        during the 15 days of the Chinese New Year celebration period you should 
      not use negative words and phrases as this is the time for happiness and 
      looking forward to prosperity

·        during the 15 days of the Chinese New Year celebration period do not throw 
      anything away for throwing away things during this time is akin to throwing 
      away good luck

·        Try to avoid white and black colours, both of them symbolize death in 
      Chinese culture

·        Red and gold are the colours of luck and prosperity

The Indian Community has some interesting taboos that were passed down 
through the generations that involve Indian girls like:

·        one common taboo is that unmarried couples should not hold hands in public  
      ... if you are married it is okay .... but if you are just dating, holding hands 
      in public, whether or not you are with your own Indian Community or 
      amongst other communities, it is deemed inappropriate 

·      since holding hands in public is deemed inappropriate, then kissing and 
     hugging in public is totally of the out of the question  

·    Indian girls in Malaysia are not encouraged to wear short skirts or short pants in public 

Social Taboos You Cannot Ignore

Many people from the different Communities in Malaysia, before they decide to buy a property, whether it is a house, condominium, apartment or shop will consider many factors that may be considered to be “non-scientific” or even “superstitious”

Within Malaysian property context, “non-scientific” or even “superstitious” factors like the property’s “Feng Tsui”, its location at “T” Junction, its location below the road level, and the number (address) of the property are important factors that a property buyer cannot ignore

These “non-scientific” factors are very real and you ignore them at your own peril when you want to sell the property later. You either will not be able to sell it or you will be forced to sell the property at a very much reduced price.

How Social Taboos Affect Property Prices 

Let us go on a journey to find out how Social Taboos affect property prices particularly in Malaysia.

The Chinese Taboo on No 4

To many Chinese people, the number “4” is tabooed. It sounds like death in Mandarin and in many other Chinese dialects. Be careful to avoid buying a property with No. 4 as part of its address, especially when the property is located in an area where the majority residents are Chinese. When the time comes for you to sell your property you may encounter difficulties finding a buyer or if a buyer is found he may want to discount the price on account of the tabooed No. 4.

The International Taboo on No 13

If you were to enter some Office Buildings in Kuala Lumpur you will likely find “Level 13” and “13th Floor” missing in the lift buttons and on the Tenants Directory. In place of “13” you will find either “11A” or “12A”. It looks like the number “13” is tabooed in some places. As with No. 4, avoid buying a property with No. 13 as part of its address. The taboo against number “13” is not as strong as the taboo against No. 4. All the same when it comes time to sell your property you may have difficulties finding a buyer or if a buyer is found he may want to discount the price because of the tabooed No. 13.

Property Facing “T” Junction

All the 3 major Communities in Malaysia, the Malay, Chinese and Indian have a dislike for properties facing a “T” Junction. They each have their own taboos and aversions for properties facing a “T” Junction. The Chinese believe that with your house facing a “T” Junction and with ghosts and spirits roaming the streets at night, especially at the time of the hungry ghost festival, when the gates of hell are opened and spirits enter the earthly realm. They flood the streets and with your house facing the "T" junction, you and your family are at risk of being invaded and inundated by these "Hungry Ghosts". You ignore this taboo at your own peril when it comes time for you to sell your property.  

Property below Road Level 

All the 3 major Communities in Malaysia, the Malay, Chinese and Indian have a dislike for properties located below road level. They each have their own taboos and aversions for properties located below road level. The Chinese believe that with your house located below road level, all the bad luck of residents in the entire neighbourhood that flow from their houses onto the road will eventually flow into your house. To the Chinese to have such bad luck flowing into their house is unacceptable and they will at all cost avoid buying a property located below road level. You ignore this taboo at your own peril when it comes time for you to sell your property.  

Property with Steep Slope

The Chinese do not like to have a house built on land with a steep slope with the access road slopping towards the frontage road. The Malay and Indian Communities also dislike houses built on land with a steep slope towards the frontage road. They have their own taboos and aversions. The Chinese believe that with his house built on land with a steep slope with the access road slopping towards the frontage road, all his wealth, prosperity and luck will flow away down the slopping road to his neighbours below him. You ignore this taboo at your own peril when it comes time for you to sell your property. 

Haunted Properties

When you are looking to buy a property and you are looking for taboos, the above listed taboos are easy to identify because they have physical features you can look out for. When it comes to making sure that the property is not haunted, it is much harder. How do you know if a house is haunted? You will have to extensively investigate into the background and history of that property for the answer. 

The Seller will not tell you. The Real Estate Agent will not tell you. What then should you do? My advice is "if you are in doubt about whether the property is haunted, just give it a pass and move to other similar properties that are clean and not haunted". However if you "fell in love with that property" and will not easily give it up, there are some steps to follow to get the information you need to help you decide:- 

·        Check how frequent the tenants/occupants move in and 
      move out of this property 
       
·       At the time when you were introduced to this property by the Agent, 
      was it vacant and unoccupied? 

·        If it was vacant, find out how long the last tenant/occupant stayed 
      before they move out 

·    Visit the property at night and observe from the outside if you can hear "funny noises" or observe unusual activities inside or outside the property

If after all these investigations you still have doubts, give it a miss and move 
on to consider other properties.  

However, if you are a fervent believer in the Power of your God to help you get rid of 
the "ghosts and spirits" there and your God can help you cleanse the property 
of these evil spirits, then by all means go ahead and negotiate for a "give-away" 
price as you may be the ONLY BUYER the Seller has who is willing to 
buy his property. 

Properties beside High Tension Electric Power Lines

Properties that are built beside High Tension Electric Power Lines are also shunned by all the Communities in Malaysia including Malay, Chinese, Indian and Eurasian Communities and the Indigenous people of Sabah and Sarawak. They shun such properties for health reasons and not due to cultural taboos. Studies by Scientists have shown that High Tension Electric Power Lines emit radioactive rays like gamma rays. It has also been shown by Scientists that prolonged exposure to radioactive rays like gamma rays can increase the risk of cancer to those who live in houses that are near and beside High Tension Electric Power Lines.

When you buy a property from the secondary market do be careful to make sure the property you are looking at is at least 500 meters from the nearest High Tension Electric Power Lines to be absolutely sure that you are safe from exposure to gamma rays radiation. 

If you are buying a property “off-plan” from a developer, visit the development site and at best you can ascertain the location of the nearest High Tension Electric Power Lines. If you are unable to find anything and you are still uneasy, engage the services of an Electrical Engineer to investigate. The Electrical Engineer knows how and from where to get the information. It is worth the Professional Fess you pay the Electrical Engineer. If the Electrical Engineer reports that there is a possibility that High Tension Electric Power Lines may be built near the property you intend to purchase, however remote that may be, give it a miss, move on to other Development Projects. Your family's health and safety should be above all other considerations.  

On-Line Property Price Search Websites in Malaysia

Before you purchase your next property, you may want visit http://www.ipropertydata.com and check out for yourself latest prices of the types of properties you intend to purchase.

Monday, 13 January 2014

Property Valuation in Malaysia

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 for 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 (2) 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 RM5,000.00. 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 3 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 the RM180,000 Housing Loan that represents 90% 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. Ahmad's efforts were complicated by the current high expectations of Sellers (often on the advice of Real Estate Agents) vis-a-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% Earnest Payment 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 Bank's Policy to have the property Ahmad intends to purchase to be valued by a Valuer on the Bank's Panel of Valuers. The Bank Officer also tells Ahmad that the Valuer's 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 he requested that Zulkilfli's 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 Zulkifli's Firm is not on the Bank's Panel of Valuers.

Ahmad reluctantly agreed that the Bank Officer appoints a Valuer that is on the Bank's Panel of Valuers to value the apartment he intends to buy. The Bank Officer also requested that Ahmad pays to him the valuation fees and he would forward the valuation fees to the Valuer.

About a week later, the Bank Officer calls Ahmad and tells him the Valuer has submitted to the Bank his Valuation Report. When Ahmad asked about the value of the apartment, the Bank Officer tells Ahmad that the Bank's Panel Valuer has valued the apartment at RM190,000. The Bank Officer tells Ahmad that at 90% 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 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 90% 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, Ahmad and his wife can try to raise the additional RM36,000, money they do 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 who also have to face the same dilemma that Ahmad and his wife will now have to confront.

Questions Malaysian Borrowers Ask

The dilemma that Ahmad and his wife are now confronting 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:

1.00     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?

2.00     If indeed it is the Bank’s Policy to have the property I intend to buy valued, 
            why must it be valued by a Valuer on the Bank’s Panel of Valuers?

3.00     Can I appoint a Valuer of my choice for as long as this is 
            a Qualified Registered Valuer since I am going to be the one who pays the 
            Valuer’s Professional Fees?

4.00     After the Bank’s 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 Valuer’s Valuation Report?

5.00     How is it possible that when two (2) or more Valuers are instructed to 
            value the same property at the same time, they produce separate 
            Valuation Reports with the Subject Property’s value vastly different and 
            the variation can range from 30% between the lowest and the highest value 
            to 3 or 4 times between the lowest and the highest value?  
  
6.00    For the valuation of an ordinary residential property in the Klang Valley, how 
           much time would the Valuer require to inspect the property and prepare and 
           complete the Valuation Report?

What is Property Valuation?

Property Valuation is neither a Science nor is it 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 experiences as a Property Valuer and how he interprets and analyzes all the information he has on the physical and other related characteristics of the property and information he procured on prices recently paid by purchasers of properties in the vicinity and neighbourhood 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.

Property Valuation Profession in Malaysia

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 practice 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 (2) years. After having completed his two (2) years “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 authorized to carry out Property Valuations and Plant & 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 & Machinery Valuation are treated as two separate disciplines in these countries given that the valuation of plant & machinery is a highly specialized field of study that requires distinct and specialized methods to carry out these valuations.

Property Valuation Profession in Commonwealth Countries and USA

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 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 arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

What is a Valuer’s job?

A Valuer’s 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, to occupy or for speculation:.

1.00     Identify and define the Property (or Real Estate) to be valued.

2.00     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 Tenant’s Interest.
  
3.00   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 Valuer’s Appointment rather it is the Date when the cause of action arose, usually many years ago).

4.00    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.

5.00    The appropriate Method of Valuation should be chosen and adopted 
           by the Valuer for the specific Purpose and Objective and Type of Value 
           specified by the Client for the Property to be valued.

6.00    The Valuer should clearly state in his Valuation Report the 
           Limiting Conditions, if any, that his Valuation of the Property is subjected to.

Malaysian Borrowers’ Questions Answered

I will attempt to answer the 6 questions commonly asked by Malaysian Borrowers as listed above:-

1.00    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 Bank’s money that would be at risk if sometime into the future, the Borrower falls on hard times and 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 Bank’s Panel Valuer advise the Bank on the Fair and Correct Market Value of the property at the time when the Housing Loan is granted.

2.00     If indeed it is the Bank’s Policy to have the property I intend to buy 
            valued, why must it be valued by a Valuer on the Bank’s 
            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 Valuation Reports prepared by Valuers that are on the Banks’ Panel of Valuers. There are however exceptions to this General Rule. It would be up to 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 Bank’s Panel of Valuers?

This is a fair question. What should be the answer?

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.

3.00     Can I appoint a Valuer of my choice for as long as this is a 
            Qualified Registered Valuer since I am going to be the one 
            who pays the Valuer’s 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 you have chosen 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 Bank’s “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.

4.00     After the Bank’s 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’s Valuer’s Valuation Report?

As an Individual and a Member of the Public, you have the right to challenge any Professional Opinion of a Valuer vis-à-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 Valuer’s 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?
  
5.00     How is it possible that when two (2) or more Valuers are instructed at the same time to value the same property that they can produce separate Valuation Reports with the Subject Property’s value vastly different and the variations can range from 30% between the lowest value and the highest value (at the lower range) to 300% or 400% 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 detached house in Damansara Heights, Kuala Lumpur.

However when these two or three Valuers are instructed at the same time to value a 50 acres 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 50 acres plot of vacant land in Kajang, Selangor ranging in their differences from 50% between the lowest value and the highest value (at the lower range) to even 400% between the lowest value and the highest value (at the higher range).  In absolute figures, Valuer A may value the 50 acres vacant land 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 acres plot of vacant land in Kajang, Selangor 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 50 acres 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 property’s 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% higher than the Valuation of Valuer A
  
6.00     For the valuation of an ordinary residential property in the Klang Valley, how much time would the Valuer require to inspect the property and prepare and complete the Valuation Report?

For a simple valuation of a residential property in Kuala Lumpur, Petaling Jaya, Subang Jaya and Shah Alam, the Valuer, from the time he was instructed, should not take more than 14 days to complete the inspection of the Property, making all necessary background investigations and preparation and submission of his completed Valuation Report.

For more complicated valuation of an Industrial Plant, it would of necessity take more time, up to 2 or 3 months, depending on the size and complexity of the Plant.

On-Line Property Price Search Websites in Malaysia

Before you purchase your next property, you may want visit http://www.ipropertydata.com and check out for yourself latest prices of the types of properties you intend to purchase.


Sunday, 12 January 2014

Ten Steps to Financial Ruin (Personal and National)

In my previous 2 articles (NST RED 13th and 20th July 2012), I examined the causes and events that led Malaysians to be caught in the Malaysian Property Dilemma”. Like the situations in Ireland and Spain, the phenomenal increase in property prices in Malaysia during the past 3 years is fuelled, in part, by the abundance of Bank Loans with extended (30 years) repayment periods that are made freely available to those who apply. This surge in the availability of Bank Loans with easy repayment periods of up to 30 years, almost overnight created a new and aggressive group of property-hungry Malaysians vis-à-vis Generation-Y, the 20s and 30s newly graduated and newly affluent young Malaysians.

Prelude to Financial Ruin

In my previous article (NST RED 27th July 2012) I concluded Malaysian Property Sellers are also caught in a Property Sellers Dilemma. They cannot afford to sell! They also cannot afford not to sell! It has happened before in 1997/1998. It can happen again if no action is taken. How long can the Twin Dilemmas of the Malaysian Property Dilemma and the Property Sellers Dilemma continue before we find ourselves in a Property Market Crash?

In my previous article (NST RED 17th August 2012), on behalf of the thousands of Malaysian families now drowning in their housing loan debts or barely keeping their heads and noses above water, I appealed to the Prime Minister to intervene to have Bank Negara Malaysia impose a Malaysia-wide Housing Loan Repayment Moratorium to be implemented by Malaysian Banks for durations of between 3 to 5 years.

In my previous Article (NST RED 3rd August 2012) I likened the troubled Malaysian Property Market as the stricken Boeing 747 Jumbo Jet that had lost two of its four engines when flying over the Indian Ocean. Like the stricken Boeing 747 Jumbo Jet losing vital engines, the troubled Malaysian Property Market had also lost vital engines. It had lost consumers and buyers who can no longer afford to buy properties at such high prices.

Like the Captain of the stricken Boeing 747 Jumbo Jet, the Prime Minister of Malaysia, the Captain of the troubled Malaysian Property Market knows that he has to take immediate actions to avert a very real possibility the troubled Malaysian Property Market may be heading for a Crash Landing.

What can the Prime Minister do to prevent the troubled Malaysian Property Market heading for a Crash Landing?

Could we have prevented the Twin Dilemmas of the Malaysian Property Dilemma and the Property Sellers Dilemma from happening?

The Path to Financial Ruin

Are we Malaysians and is Malaysia on the path to Financial Ruin? Are we heading to where the likes of Greece, Ireland, Portugal and Spain are: National Financial Crisis and even possible National Financial Ruin?

The path to National Financial Ruin (for the Country) and Personal Financial Ruin (for the Individual) is a well-trodden path used by many who had gone before: Nick Leeson (Singapore Derivatives), Lehman Brothers (USA Investment Bank), Barings Bank (United Kingdom Banking), Greece, Ireland, Portugal and Spain to name but a few.

Let us now follow the movements of these financially troubled entities on their journey along the path to Personal and National Financial Ruin.

Step No. 1:  Idea for a Bank Facility (Loan) or Project

When a country’s economy is good, for the individual citizens, there is an incentive to spend and to indulge. Like the citizens of Ireland and Spain, they would embark on spending sprees to buy cars, both expensive and not so expensive cars, more dangerously they would callously and without thinking buy properties they do not need and cannot afford and in places they hardly know.

As for Companies, including property developers, they will waste no time in pandering to the whims and fancies and desires of these newly affluent consumers. They will expand and they will diversify.

For Governments like Greece, they quickly embarked on massive infrastructure and capital works projects building roads and highways leading to nowhere. All these economic activities embarked upon in the name of wealth creation.

With stable political environment, short, medium and long term prospects are considered and little thought is given to possible political instability in the future. Where did these newly affluent consumers, companies and Governments find the money to spend? From the Banks.

Step No. 2:  Need or Speculative Venture?

Do you need the new car and the new house? Can you comfortably afford to pay for that detached house in Damansara Herights, Kuala Lumpur?

Do we need another 100 storey Office Tower generating another 3,000,000 sq ft office spaces for Kuala Lumpur when as at June 2011 we already have 81 million sq ft of offices with another 25 million sq ft of office spaces already in the pipe line and scheduled to come on-stream by 2015 when Kuala Lumpur will by then have a total of 105 million sq ft of office spaces.

To assist Malaysians have an understanding of the supply and demand situation of commercial spaces in Kuala Lumpur, I will quote from the Star Online statements made by Property Professionals in Malaysia as follows:-

“Total office space supply in the Klang Valley stood at 80 million sq ft at the end of 2010. Total office space supply in the Klang Valley stood at 80.8 million sq ft at the  end of the first half of 2011. It was estimated that an additional 25 million sq ft of office space would come on stream in the Klang Valley by 2015; excluding mega projects such as the Naza group's KL Metropolis development, Warisan Merdeka Tower and the Tun Razak Exchange {Kuala Lumpur International Financial District”

Christopher Boyd of CB Richard Ellis as quoted by The Star Online on 1st November 2011 

“By 2014, the Klang Valley will have 53 million sq ft of retail space in 149 malls and hypermarkets. However, only about 43 shopping centres and hypermarkets out of the existing 133 (or 30%) were performing well”
 
Allan Soo of CB Richard Ellis as quoted by The Star Online on 1st November 2011  

“A BIG pipeline of commercial properties in and around the city centre itching to be launched over the next decade or so is stoking concerns by the day. Will there be sufficient demand for all these buildings?” 

“Close to half of the TRX real estate project will comprise office buildings. The project comes along at a time when many other mammoth commercial projects such as the re-development of the 926 hectares Rubber Research Institute (RRI) Malaysia land in Sungai Buloh and Permodalan Nasional Berhad’s proposed 100 storey Menara Warisan Merdeka are poised to take off”

The Star Online 11th August 2012  

“As it is now, there is already an oversupply of commercial properties in and around the city centre”

Lim Eng Chong of Henry Butcher Malaysia as quoted by The Star Online on 11th August 2012

“The take-up rate for office buildings which are being built and will be completed this year stands at below 50%. This is for commercial properties in and around the city, but the same scenario exists further away from KL, such as in Cyberjaya; there is already an oversupply situation”

James Wong of VPC as quoted by The Star Online on 11th August 2012

In the light of the findings of Property Professionals in Malaysia, who are Experts in the own fields,  on the supply and demand situation for commercial properties in the Klang Valley, does Malaysia need and can we actually afford these Mega Projects?

Step No. 3:  Availability of Cheap Loans

The dire situation that thousands of Malaysians now find themselves to be in is due primarily to their easy access to Housing Loans with Banks offering them up to 95% of their Purchase Prices (not necessarily their actual values) and with repayment periods of up to 30, 40 or even 50 years.

Easy access to high margin Housing Loans with long repayment periods is not necessarily a good thing for Malaysians. Do not agree with this statement? Let us look at what happened in Ireland and Spain:

Spain

House ownership in Spain is above 80%. The desire to own one's own home was encouraged by governments in the 1960s and 1970s, and has thus became part of the Spanish National psyche. As feared, when the speculative bubble popped Spain became one of the worst affected countries. Spain had been the European country with the sharpest plunge in contruction rates. So far, some regions have been more affected than others (Catalonia was ahead in this regards with a 42% sales plunge while sparsely populated regions like Extremadura were down a mere 1.7% over the same period). Banks offered 40-year and more recently 50 year mortgages.

Source: Wikipedia, the free encyclopedia

Ireland

The property bubble in the Republic of Ireland was an unsustainable bubble in the price of real estate from the 1990s to 2008. The fall in domestic and commercial property prices contributed to the Irish Banking Crisis. As of February 2012, prices continue to fall. House prices in Dublin are now down 56% from peak and apartment prices down over 62%. House prices have so far returned to pre-2000 levels. Mortgage Approvals have dropped to 1971 levels.

An International Monetary Fund (IMF) Report in 2000 contended that Irish property prices were almost certainly heading for a collapse in the medium term, since "no industrial country in the last 20 years had experienced price increases on the scale of Ireland without suffering a subsequent fall".

There had also been reported cases of mortgage fraud where borrowers overestimate their income to enable them to borrow more. There is a worry that these people "could fall into serious debt if Ireland had a property crises like that in Britain in the late 1980s. These experiences had resulted in the 'sub-prime residential mortgage fallout" in the United States".

Many bank economists, media commentators, estate agents, property developers and business leaders went on the record to state their belief that the Irish property market was healty, and that any decrease in house prices was indicative of a soft landing only.

As of November 2011, prices continued to fall. House prices in Dublin are now down 51% from peak and apartment prices down over 60%. House prices so far returned to year 2000 levels.

Source:  Wikipedia, the free encyclopedia

Step No. 4:  Inadequate Feasibility Studies with Poor Risk Assessments

Malaysian Banks, before they lend money, often money lent to developers and house purchasers totalling in the Millions of Ringgit, should first carry out “Feasibility Studies” and they should investigate the viability of each potential project as well as all the options available.

I am informed that not many Banks in Malaysia carried out detailed and exhaustive “Feasibility Studies” and they did not thoroughly investigate the viability of each potential project as well as all the potential risks involved with the project.

If Malaysian Banks had in fact carried out these detailed and exhaustive “Feasibility Studies” and if they had in fact thoroughly investigated the viability of each potential project as well as all the potential risks involved with the project, Malaysia would have been spared the thousands of abandoned housing projects that dot our landscape throughout the country. Furthermore thousands of Malaysian families would have been spared the emotional anguish and trauma and financial pains of having to continue to pay Malaysian Banks for the Housing Loans already released to these developers and yet not having the houses they purchased.

Such unfortunate consequences that these Malaysian families are now having to bear, to a large extent is due to Malaysian Banks’ failure to undertake in an organized way appropriate Risk Assessment and their failure to identify all the risks and not evaluating all the risks accurately, both Qualitatively and Quantitatively, even when these risks have been identified.

Due to their poor Risk Management procedures, Malaysian Banks, after having identified these “Risks”, they did not deal with these risks in an adequate way. The Result: Disasters occur and we find ourselves burdened with the many abandoned housing projects with dire consequences for thousands of Malaysian families.

Step No. 5:  Banks not properly Managed

In this respect I am happy to note that Malaysian Banks are generally well and properly managed. Our Central Bank, Bank Negara Malaysia also has a tight rein and control over Malaysian Banks.

This situation unfortunatekly cannot be said of Banks in the United States and even in Europe. The BBC on 24-08-2012 reported via Internet News that HSBC, Standard Chartered Bank and several European banks have been under investigation by US regulators such as the US Treasury Department's Office of Foreign Assets Controll, the Federal Reserve, the US Senate's Permanent Subcommittee on Investigations and the Manhattan District Attorney, Cyrus Vance Jr.

1.00     In America and Britain, Barclays Bank PLC was found to have illegally 
            manipulated the mechanism for fixing the daily LIBOR Interest Rate. 
            Barclays Bank PLC was fined by both the British and 
            the United States Government.

2.00    In America, HSBC was investigated and accused by the Government 
           of New York State to have allowed their New York Branch Office 
           to be a channel for the laundering of illegal drug money from Mexico 
           to the United States through HSBC’s Mexico Office.

3.00     In America, Standard Chartered Bank was investigated and accused by the United States
            Government of illegally helping Iran to move Billions of US Dollars through the American
            banking System thereby violating American Government and United Nations Rules
            for the sanction of Iran. Standard Chartered Bank has already agreed to pay
            USD340 Million to New York Authorities to settle its case.

Step No. 6:  Premature Project Commencement

Starting projects before funding for the whole project has been negotiated and agreed upon with Bankers is a dangerous and at times a disastrous venture. Similarly disastrous for both the Bankers and Developers is the habit of Malaysian Developers of not carrying out “Market Studies” to ascertain the level of demand (actual demand) for the products and properties that are being developed and expected to be sold in the Malaysian Property Market Place.

Starting projects well before pre-let contracts are negotiated and agreed upon with between the Developers and their potential Tenants may prove to be disastrous ventures. The findings of James Wong of VPC that “The take-up rate for office buildings which are being built and will be completed this year stands at below 50%” bear witness to these disastrous consequences.

The existence of thousands of abandoned housing projects throughout the country and the emotional anguish and trauma and financial pains that thousands of Malaysian families are now suffering bear witness to the disastrous consequences of Bankers’ and Developers’ failures to carry out detailed and exhaustive “Feasibility Studies” and to thoroughly investigate the viability of each potential project as well as the competence and financial capacity of the Developers.

Step No. 7:  Change to a Hostile Economic or Political Environment

When the National Economy and the Regional Economy collapses, most economic activities will come to a stand-still. Bank Loans already approved will be frozen and in many cases, withdrawn by the Banks. Following closely on the heels of such developments, foreign exchange rates will fall; if the Developers have borrowed from Foreign Banks, their Loan Repayments will rise.

Confidence for further investments as well as of potential users of facilities including hotels, sports stadiums, offices and shopping malls will drop resulting in many empty and unoccupied hotel rooms, office suites and shopping mall retail outlets.

Such hostile economic environments will shake confidence in the Share Markets leading to massive sell-outs of shares that in turn lead to drop in share prices (values) ultimately leading to the collapse of Companies, even long and well established Companies.

When such adverse economic environments are compounded with Political unrest caused by for example the dismissal of the Prime Minister and his Government or scandals associated with a government official can cause more turmoil and instability to the Nation.

Sounds familiar? Remember the 1997/1998 Asian Financial Crisis?

Step No. 8:  Loss of Market Confidence

Remember the aftermath of the 1997/1998 Asian Financial Crisis? Share prices and values of Companies fell. There were fewer new tenants and many existing tenants did not renew their tenancies. Many Companies either went bankrupt or were drastically shrunk in size and business resulting in many of their employees and workers becoming unemployed. With such massive retrenchments of workers and employees, an “Economic Tsunami” swept through the Nation causing great instability.

To stem the outflow of funds the Government increased interest rates with dire consequences for the domestic economy. The few remaining companies and manufacturing facilities still standing were forced to close as they could no longer pay their Banks the increased interest.

In spite of the Government’s efforts to stem the outflow of funds, International Currency Speculators continued to attack the County’s Currency until the Government was forced to devalue the local currency with more dire consequences for the domestic economy. 

Imports became more expensive and businesses with Foreign Loans were now forced to close because they could no longer keep up with the payments to their Foreign Lenders.

The net results: More unemployment.

Remember Thailand and South Korea? This was what happened to these two (2) Countries and their Citizens.

Step No. 9:  Loan Repayments Increase

Before and during the Asian Financial Crisis, the Governments of Thailand and South Korea borrowed heavily from Foreign Lenders and their Companies also did the same. Consequently the Governments and Businesses of Thailand and South Korea had to pay heavily for these Foreign Loans due to the greatly devalued Thai Bhats and Korean Wons.

I remember reading in the newspapers during the height of the 1997/1998 Asian Financial Crisis, that patriotic South Korean Citizens lined up at their Central Bank in Seoul to hand over their personal jewelleries to help their beloved Country, South Korea meet its obligations to Foreign Lenders.

When Governments like Thailand and South Korea borrowed heavily from Foreign Lenders to pay for Capital Projects, when their economies took a dive and their currencies were devalued, they will have to pay more for the Foreign Currency Loans with money that they do not have.

Further when Governments and Businesses did not carry out detailed and exhaustive “Feasibility Studies” and if they did not thoroughly investigate the viability of each potential project as well as all the potential risks that they may be exposed to including political and currency and economic risks they are creating an environment for a “Perfect Storm of Disasters”.

Step No. 10:  Finished Project Income Failure

Even after against all odds, the National Government managed to raise all the money needed and finally completed the Project like Greece’s massive infrastructure and capital works projects building roads and highways leading to nowhere. These Projects were started 10 years ago in the 2000s.

Fast forward to 2012, where is Greece now? They could not find the money to pay their Lenders for the Loans given to Greece 10 years ago. Greece is now nearly a bankrupt country.

Spain also finds itself in a similar situation. More than 10 years ago Spanish Developers went on a rampage to build and build houses and Spanish citizens, with abundance of bank loans went on to buy and buy. The Provincial Governments, to compete for “Investments” into their local areas went on to build and build infrastructures with borrowed money.

Fast forward to 2012, where is Spain now? Spanish Developers could not find the money to pay their Lenders, Spanish buyers could not pay their Banks and the Provincial Governments of Spain could not pay their Banks.

The consequence: The Federal Government of Spain has to go to the European Union and borrow heavily to pay the debts of Spanish Developers, Spanish House Buyers and Provincial Governments of Spain.

What will happen to Greece and Spain? Will they FACE FINANCIAL RUIN?

Conclusion

Are we Malaysians and is Malaysia on the path to Financial Ruin? Are we heading to where the likes of Greece, Ireland, Portugal and Spain are: National Financial Crisis and even possible National Financial Ruin?

Malaysians: You be the Judge.

Advice to the Nobodies

From one nobody to another, we as nobodies cannot influence what happens to Malaysia. This is the exclusive preserves of the Powers-that-Are. For us nobodies, please let us be careful and do not fall into the financial traps that many unfortunate Malaysians now find themselves in.

Better to be safe than to be sorry.

On-Line Property Price Search Websites in Malaysia

Before you purchase your next property, you may want visit http://www.ipropertydata.com and check out for yourself latest prices of the types of properties you intend to purchase.