REM151: VALUATION TECHNIQUES

TOPIC 1- MARKET APPROACH

LEARNING OUTCOME
CLO 1 – Explain the basic principles of valuation approaches in property valuation
CLO 2 - Analyze data for valuation purposes by using appropriate approaches in property
valuation
CLO 3 – Demonstrate the ethical procedure in valuing the market value of property

WHICH IS MFA, AFA, GFA?

INTRODUCTION
Statutory Valuation & Non-Statutory Valuation
Statutory Valuation - Refer to legal required, government requirements for undertake the
valuation. For example, land acquisition and compensation, rating and taxing.
Non-Statutory Valuation - Refer to valuation that use for selling and buying, leasing, fire
insurance and mortgage

Land Area vs Floor Area vs Built Up Area

Main Floor Area (MFA) – Refer to building component itself.
Ancillary Floor Area (AFA) – No enclosed wall. Provide necessary support to the primary
activities or operation of an organization. For example, sheds, garages.
Gross Floor Area (GFA) – Floor area within the inside perimeter of exterior walls of the
building under consideration, exclusive of vent shafts and courts, without deduction for the
corridors, stairways, closets, columns or other features (GFA = MFA + AFA)
Net Floor Area (NFA) - The actual occupied area

DEFINITIONS
Value (Definitions as in MVS)
- Value is an economic concept referring to the price most likely to be concluded by
the buyers and sellers of a good or service that is available for purchase.
- Value is not a fact, but an estimate of the likely price to be paid for goods and
services at a given time in accordance with a particular definition of value.
- The economic concept of value reflects a market’s view of the benefits that accrue to
one who owns the goods or receives the services as of the effective date of valuation
Valuation (Definitions as in MVS)
- ‘Valuation means the written opinion as to capital or rental value on any given basis
in respect of an interest in property, with or without any assumptions or qualifications’

TYPES OF PROPERTY
Residential Properties (Landed & Strata)
Commercial Properties
Industrial Properties
Recreational Properties
Institutional Properties
Others

Residential Properties
• Receiving Instruction
• Determine the Purpose & Basis of Valuation
• Capital Valuation/Rental Valuation
- Refer MVS 3, MVS 4, MVS 5
• Collect Complete Property Details
- Lot No, Title No, Seksyen/Town/Mukim/District/State/Address of the
property, land area, registered owner
• Determine the interest to be value
• & Determine Valuation Approach (MVS 7)
-Freehold/Leasehold, With/Without Vacant possession, landlord/tenant/other
party’s interest
• Determine the date of valuation (D.O.V)
-if it is not stated, the date of valuation is the date of inspection
• Inspection (MVS 6)
- Preparation Before Inspection
- During Inspection
- After Inspection
• Opinion of Value Presenting in Valuation Report (MVS 8)

The valuation of subject property is conducted based on the purpose of valuation. Different
types and purposes of valuation require different approaches of valuation.

MARKET APPROACH
- The most popular method to value property, most common and widely used
approach.
- Research by Yu et.al (1991) on 34 valuation firms in Singapore showed that 94% of
the firms regularly used comparison approach.
- Also known as Comparative Sales Approach/Comparison Approach and Market Data
Approach.
- Based on the Principle Of Substitution: The value of a property is set by the price
paid for other properties having equivalent utilities.
- Valuation of a property can be made by direct comparison with prices paid for similar
properties in similar location within recent period of time.
- The method rests on the basis that price is the best indicator of value.

Example:
Property A Property B Property C

RM? RM115, 000 RM115, 000

The value of Property A can be determined by the price paid for Property B and C

Property A is called subject property.

Property B and C are known as comparable properties.

The Ideal Condition for This Approach

- The properties are similar physically.
- The properties are in the same locality.
- The properties have similar legal interest.

The Ideal Condition for This Approach

Similarity in:
- type of property
- location
- time factor
- tenure
- physical factor

The Ideal Condition for This Approach

• Reliable comparable:
i. Efficient records of many transactions.
ii. The transactions are fairly recent. (As near to the date of valuation).
iii. The economic factors underlying the trend of prices in the property market have been
studied.

The Ideal Condition for This Approach

• Transactions of the comparable are of MARKET VALUE TRANSACTION (bona fide
transaction), excluding the following transactions:
i. There is a relationship between buyer and seller such as siblings, husband and wife,
director to his company etc.
ii. Transactions between creditors and debtors
iii. Transaction in an unstable market (war)
iv. Prices far off the normal market value.

Bona Fide Transaction

- Willing buyer/willing purchaser
- Arm’s length transaction
- After proper marketing
- The parties acted knowledgeably, prudently and without compulsion.

Sources of Transaction Data

i. Sale evidence from Jabatan Penilaian dan Perkhidmatan Harta.
ii. Title Search at the Land Office or the Registry office.
iii. Sale and Purchase Agreement.
iv. Newspaper/journals/Annual Report etc.

Work Process in Comparison Method

• Identify and list comparables
• Select Valid comparables
• Analysis of selected comparables
• Adjustments
• Derive value per unit
• Value the property
CRITERIA OF COMPARABLE
a) Date of Valuation:
- Date of S&P agreement
- Date of registration of transaction
- Nearest date to the date of valuation
b) Bona fide transaction
c) The transaction is not by a special purchaser
d) Registered transaction/sales.
e) The comparable must be similar in term of:
- type
- location
- title
- physical factors –size,
- topography
- construction
- cultivation
- age/maintenance
-
Analysis of comparables
• Analysis based on land area
• Analysis based on built up area
• Analysis based on summation approach
•
1. Analysis based on land area

• for agriculture property, development land, standard housing.

• Unit of comparison = Price/land area
• Example:
• 1. A rubber land with area of 2 acres sold for RM50,000.
Unit of comparison= RM50,000/2 acres
= RM25,000 per acre
• 2. A standard 1-storey terrace house with area of 130 sq. m. was sold for
RM160,000.
Unit of comparison= RM160,000/130 sq m
= RM1230 per sq m

2. Analysis based on built-up area (floor area)

• for strata property – apartment, flat, shoplot

• Unit of comparison = Price/built-up area
• Example: A parcel of walk-up flat with area of 56 sq. m. was sold for RM60,000.
Unit of comparison= RM60,000/56 sq m
= RM1071 per sq m

3) Analysis based on summation approach

• Breakdown of value into land value and building value. More specific calculation
considering renovation and extension.
• Unit of comparison = Price – Building Value
Land area
= Residual Land price
Land area
=Land value
• Example: A renovated 1-storey terrace house with building value of RM80,000 and
land area of 130 sq. m was sold for RM180,000.
 Unit of comparison= (RM180,000-RM80,000)/130 sq m
= RM769 per sq m (land value)

Unit Of Comparison
Properties of different sizes are reduced to a common unit of area to enable comparison to
be made between them.

Type of Property Unit of comparisons Unit of comparisons

(metric) (Imperial)

Residential Per metre square Per square foot

Factories / warehouses Per metre square Per square foot

Shops Per metre square Per square foot

Offices Per metre square Per square foot

Agricultural land Per hectare Per acre

Cinema /theatres Per seat

Type of Comparison
1. Direct Comparison
2. Adjusted Comparison

1) Direct Comparison
For property which is almost the same.
Subject property and comparable property are within same level

Example 1:
Subject Property = Property A
Date of Valuation = 1.11.2011
A nearby Property B, which is similar to Property A was transacted at 1.11.2011
@RM70,000.
By direct comparison, the value of Property A is also RM70, 000.

Example 2:
Property A is consequently to be valued on 1.12 2011. Since it was recently valued
at RM70,000 on 1.9.2011, hence the value MV on 1.12 2011 is also RM70,000.

2) Adjusted Comparison
Subject property and comparable property are at different levels
- Slight differences in the characteristics of the comparable and the subject property.
- Require some adjustments so as to make the comparable as similar as possible to
the subject property.
- The best comparable is the one with minimum least adjustment.
Adjustment
A process of modifying the value of the comparable properties to be the basis of valuing the
subject property.

Categories of adjustment
i. Upward adjustment (+) if subject property is better or superior than comparable
property.
ii. Downward adjustment (-) if subject property is inferior than comparable property.
iii. Multiple adjustment - for comparable property having both superior and inferior
characteristics to the subject property.

e.g. Unit of comparison= RM200 psm

Adjustments
Location +10%
Terrain -5%
+5% +RM10 psm
Value of Subject property RM210 psm

Adjustment factors/items
Items that can be adjusted;
- Time factor
- Location
- Age of cultivation/building
- Topography/terrain
- Size
- Shape
- Ownership

Type of adjustment
a) Percentage adjustment
b) Ringgit adjustment
c) Overall adjustment

Percentage adjustment
Example:
Comparable Property B was transacted @ RM30,000 per hectare.
It is located frontage a main road.
Subject property A, have the same characteristics as B, but located on the second
layer. Therefor the adjustment to get the value of A is:
Property B RM30,000 per hectare
Location of A second layer
(inferior) - 20 % RM 6,000
RM24,000

The appropriate value for A is RM24,000 per hectare.

Ringgit adjustment
Example:
• Comparable Property B was transacted @RM30,000 per hectare. The lot is flat and
level.
• Subject lot A is slightly lower 1 foot than the surrounding lot.
• Property B RM30,000 per hectare
Land need to be filled
Less cost of filling RM 8,000 per hectare
 RM22,000 per hectare

The appropriate value for A is RM22,000 per hectare.

Overall adjustment
Example:
• Comparable Property B was transacted @ RM30,000 per hectare. It is located
fronting the main road. The land is flat and level.
• Subject Property A have the same characteristics but situated in the second layer
and slightly lower than the surrounding lot. The adjustment to get the value of A is:
Property B RM30,000 per hectare
- Situated second layer
- land needs filling
RM12,000 per hectare
RM18,000 per hectare

The value of A is RM 18,000 per hectare.

Weaknesses
• No comparable properties
• Very subjective - intuition / experience
• Lack of information on open market
• Past records of transaction

CONCLUSION
Most certainly advocate the greater use of this method because it calls the valuer’s utmost
skill; analytical skills not only common taught in valuation course, but also his intellectual
powers, integrity, experience and judgment.
HOW TO DO A VALUATION USING MARKET APPROACH?
• Valuation Of Market Approach
a) Valuation of the land without building
example: agriculture land, vacant land.
b) Valuation of the land and building
example: house, shophouse.

a) Valuation Of The Land Without Building

Analysis of each selected comparables. (at least 3 comparables)
Transaction Price RMxxxx
Divide by land area ?acre/hectare
= RMxxx per acre/per hectare

a) Valuation Of The Land Without Building (cont’d)

cont’d
RMxxx per acre/per hectare
Adjustment
Location +- %
Time +-%
Cultivation +-%
Others +-% +-?% (total adjustment)
Adjusted Land Value RMxxx per acre/per hectare

a) Valuation Of The Land Without Building (cont’d)

Valuation
Land Area (subject property)
x Adjusted land value (selected comparable)
Market Value

b) Valuation Of The Land And Building

Analysis of each selected comparables. (at least 3 comparables)
Transaction Price RMxxx
(-) Building Value
MFA x RM psm/psf
AFA x RM psm/psf
(RMxx)
Land Value RMxxx

b) Valuation Of The Land And Building (cont’d)

Land Value RMxxxx
Divide by land area ? sq m / sq ft
= RMxxx psm/psf

b) Valuation Of The Land And Building (cont’d)

cont’d
RMxxx psm/psf
Adjustment
Location +- %
Time +-%
Others +-% +-?% (total adjustment)
Adjusted Land Value RMxxx psm/psf
b) Valuation Of The Land And Building (cont’d)
Valuation

Land Value
Land Area (subject property) ? sm/sf
x Adjusted land value
(selected comparable) RM psm/psf
Land Value RMxxx

b) Valuation Of The Land And Building (cont’d)

Building Value
MFA x RM? psm/psf
AFA x RM? psm/psf
Building Value RMxxx

b) Valuation Of The Land And Building (c0nt’d)

Valuation

Land Value + Building Value = Market Value

 ZONING AS A METHOD OF ANALYSIS
WHAT ABOUT PROPERTY HAVE A RENTAL?

• Used in the analysis of rental evidences.

• Rests on the thesis that the front portion of a shop (i.e the frontage) is more valuable
than the rear portion.
• This is applicable mainly for analyzing commercial properties with different frontage
size at strategic locations. It is referred to as HORIZONTAL ZONING.
• Also, the lower part of a building (ground floor) is more valuable than the upper
floors;
• This is applicable to almost all types of property and it is referred to as VERTICAL
ZONING.

OVERALL ANALYSIS OF RENT

• Example:
A shop with an area of 162.5 sq.m on the ground floor (6.5 m x 25 m) is let out @ RM6, 000
per annum.
Overall analysis of the rent:
= RM6, 000
162.5 sq.m
= RM36.92 per sq.m
Say: RM37 per sq.m
• In this way we assume that the value of the property is the same irrespective of the
portion i.e whether at the rear or frontage.

HORIZONTAL ZONING METHOD OF ANALYSIS

Horizontal Zoning method of analysis
• The building is divided into 3 zones
• Zone A is for the front portion, Zone B for the middle and Zone C for the rear portion
• The basis of analysis is that Zone B is half of the rental rate of Zone A; Zone C is half
of the rental rate of Zone B.

HORIZONTAL ZONING METHOD OF ANALYSIS

• Example:
Zone A= 6.5x6 x 1 = 39
Zone B= 6.5x6 x 1/2 = 19.5
Zone C= 6.5x13x 1/4= 21.13
Adjusted area 79.63 sq.m

Rent per annum RM6,000

Adjusted area 79.63
= RM75 .35 per sq.m Say = RM75 per sq.m
Therefore rent for Zone A = RM75 per sq.m
Zone B = RM37.50 per sq.m
Zone C = RM18.75 per sq.m
This process is also known as ‘halving back’

METHODS OF DETERMINING THE ZONES (IN HORIZONTAL ZONING)

Arithmetical Zoning
• The valuer must decide: the depth of the zone to be used and the monetary
relationship between one zone and another
• Normal assumption: the depth is 6-7 metres (maximum 3 zones are used) and each
zone is half as valuable as the one immediately in front of it;
Natural Zoning
 • Zone A is determined by the shallowest shop that is available as comparison.

Example of analysis and valuation by Arithmetical Horizontal Zoning

Determine the rent of Property C with an area of 12 m x 20 m.

Comparables available:
Property A : 5 m x 18 m rented @ RM2,730 per month
Property B : 10 m x 22 m rented @ RM5,500 per month

ARITHMETICAL HORIZONTAL ZONING

Analysis of Property A
Zone A 5m x 6m x X = 30X
Zone B 5m x 6m x X/2 = 15X
Zone C 5m x 6m x X/4 = 7.5X
52.5X
52.5X = RM2,730 per month
X = RM2,730
• 52.5
• = RM52 per sq. m per month

ARITHMETICAL HORIZONTAL ZONING

Analysis of Property B
Zone A 10m x 6m x X = 60X
Zone B 10m x 6m x X/2 = 30X
Zone C 10m x 10m x X/4 = 25X
115X
115X = RM5,500 sb
X = RM5,500
115
= RM48 per sq. m per month

ARITHMETICAL HORIZONTAL ZONING

What is the suitable value of X for Property C?
Value of X from analysis of Ppty A is = RM52 per sq.m
Value of X from analysis of Ppty B is = RM48 per sq.m
Therefore the average of the two is: RM50 per sq.m

Valuation for Property C:

Zone A 12m x 6m x X = 72X
Zone B 12m x 6m x X/2 = 36X
Zone C 12m x 8m x X/4 = 24X
132X
Therefore rent for Property C = 132x RM50 smp
= RM6, 600 per month.

NATURAL HORIZONTAL ZONING

Question:
Determine the rental value of Property C with an area of 12mx18m
Comparables:
Property A : 5 m x 12 m rented @ RM1,200 per month
Property B : 10 m x 18 m rented @ RM3,120 per month

NATURAL HORIZONTAL ZONING

Analysis of Property A
Zone A = 5m x 12m = RM1,200
= RM1,200
60
= RM20 per sq.m
Analysis of Property B
Zone A 10m x 12m x RM20 per sq.m = RM2,400
Zone B = RM3,120 - RM2,400
= RM720
Therefore rental for Zone B = RM720
(10 x 6) sq.m
= RM12 per sq.m
NATURAL HORIZONTAL ZONING
Valuation of Property C
Zone A 12m x 12m x RM20 per sq.m = RM2,880
Zone B 12m x 6m x RM12 per sq.m = RM 864
Therefore Rent of Property C = RM3,744 per month

VERTICAL ZONING METHOD OF ANALYSIS

• To differentiate the rental rate for the ground and upper floors
• Suitable for buildings with more than 2 storeys
• Applicable to shop house, shop office and residential units

Example
Floor area for GF = 100 sq. m
First Floor = 80 sq. m
Rent per annum = RM21, 000 (GF & FF)

VERTICAL ZONING METHOD OF ANALYSIS

• Vertical Zoning Method of Analysis
100 sqm x Y = 100 Y
80 sqm x Y/2 = 40Y
Therefore, 140Y = RM21, 000
Y = RM21,000
140 sqm
Rental Rate for GF = RM15O psqm
Rental for GF =100 sqm x RM150psqm = RM 15, 000

VERTICAL ZONING METHOD OF ANALYSIS (Cont’d)

Rental for FF = Y/2 = RM 75 sqm
Rental for FF = 80 sqm x RM75 psqm = RM 6,000
TOTAL RM 21,000