Real estate market conference-valuation

Real Estate Market & Outlook Conference2016, Phnom Penh, Cambodia

Mr. Sim Hoy Chhoung

CPA & Certified Valuer

CEO,

Vtrust Appraisal Co., Ltd

Strengthening Propertyand Financial Markets

Through SoundValuation Standards

The views and opinions expressed in this article are those of the author and do notnecessarily reflect the official position of VTrust Appraisal Co., Ltd.

April 1st , 2016Phnom Penh Hotel,

Phnom Penh.

AgendaI. Introduction

II. Valuations for Financial Reporting

III. Valuations for Secured Lending

A. Case Study and Recommendations

IV. Property Market and Banking Sector – Cambodia

V. Valuation Standards and Applications – Cambodia

VI. Well Recognized Professional and Valuation Standards

VII. Conclusion

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I. Introduction - To Set the Scene…There are growing concerns of financial regulators and stakeholders for betteridentification and communication of uncertainty in valuations

• 2008: The financial Stability Forum (FSF) published an analysis of thecauses and weaknesses that had produced the turmoil in financial marketsasking for more transparency in valuations.

• 2009: the G20 Declaration on Strengthening the financial System called forimproved standards for valuation uncertainty in the context of fair valueaccounting.

• 2009: The Basel Committee for banking supervision issued its paperSupervisory Guidance for Assessing Banks’ Financial Instrument Fair ValuePractice

• 2010: the Financial Services Authority (UK) published recommendations forthe specific assessment of valuation uncertainty.


Source: RICS Presentation, www.ricseurope.eu

I. Introduction- “Risk in property market crisis can threaten the stability of the whole

financial sector, ” H.E Kim Vada, Director General of Banking Supervision,

National Bank of Cambodia, Presentation on 18th August 2015 at

Cambodiana Hotel

- “(There need to be) a strengthening of professionalism in the valuation

practices,” Kim Vada, National Bank of Cambodia, Presentation, 18th

August 2015.

- “Accurate and professional valuations are vital to a healthy property

market and a stable economy, forming the basis of performance analysis,

financing decisions, transactional or development advice, dispute

resolution and taxation,” Royal Institute of Chartered Surveyors (RICS)


I. Introduction – Uses of Valuation Services


2 M

ain

Appl

icat

ions

ofVa

luat

ion

Valuation for FinancialReporting

Valuation for SecuredLending

Others: M&A, Buying,Selling, Renting, Tax

assessment,Insurance

Subjects of Valuation

Real property

Personal property

Business interest

Intangible assets

Plant & equipment

Trade-related property etc.

II. Valuation for Financial Reporting


Increasing Role of Valuations for Financial Reporting

II. Valuation for Financial Reporting

• The importance of fair value and similar measurements in financial reporting

mandates corresponding high-quality valuations.

• The financial crisis 2007-2008 highlighted the interdependency of the global

financial markets, and the increasingly prominent role that the valuation

profession plays in these markets.

• the valuation profession needs to address questions about the quality,

consistency, and reliability of its valuations, particularly those performed for

financial reporting purposes

• Having a substantive global valuation technical framework that is principles-

based will improve the consistency, better comparability across the financial

markets and increased confidence in the valuations performed.


PwC Called for Global Valuation Standards

Source: Point of View, Global Valuations Standards, PWC, 2013

III. Valuation for Secured Lending

• A poor or inadequate legal framework that does not allow for the efficient

functioning of the property market.

• The lack of published information or difficulty in obtaining information regarding

transactional as well as other data requisite for proper valuations.

• Greater volatility of property market

• Lack of adequately trained professional valuers

• Outdated National Valuation Standards


Valuations in emerging markets: Common Characteristics

Source: International Valuation White Paper, International Valuation Standards Committee (IVSC)


1. Commercial banks and other lenders must ensure compliance with IVS

application, Valuation for Secured Lending. Valuers must be

independent/External valuers

2. Lending institutions should clearly specify in writing the conditions of

engagement and instructions for the assignment at the outset.

3. Banks and other financial institutions should recognize the importance of

valuations undertaken by professionally qualified valuers who comply with IVS

and this white Paper

4. Institutions with regulatory functions over the valuation profession should

ensure adequate opportunity for its development as this profession is central to

the proper functioning of the property market and by extension the economy.


Valuations in emerging markets: Recommendations

Source: International Valuation White Paper, International Valuation Standards Committee (IVSC)


Primary Weaknesses inValuation Process

Observations Recommendations

1. Weaknesses ininstructions given tovaluers:

Poor valuationinstructions were acontributing factor tothe level of propertylosses incurred byLenders. Valuationsbased on vagueinstructions providedinaccurate values andtherefore inaccurateassessments of risk atthe time of underwriting.

- Banks should standardizeall valuation processes toprovide for consistencyand accurate analysisacross loan portfolio.

- Letters of instructionshould be incorporatedinto the valuation report toensure that the basis andassumptions are asrequired.


A Case Study: The Central Bank of Ireland, Valuation Processesin the Banking Crisis - Lessons Learned – Guiding the Future,Dec 2012




2. Conflicts of interest: During the volumeled transactionphase of the boomin propertydevelopment,certain valuationpractices wereaccepted by creditinstitutions thatinvolved significantconflict of interest.

- The valuers’ duty of care is tothe banks and should beemphasized by banks in theirwritten instructions.

- Banks should require valuers(or their firm) to disclose anymaterial involvement in aproperty in the valuationreport.






2. Conflicts of interest:

(Continue)

During the volumeled transactionphase of the boomin propertydevelopment,certain valuationpractices wereaccepted by creditinstitutions thatinvolved significantconflict of interest.

- Instructions to valuers shouldcome from bank staff who arenot dealing directly with loanclients.

- Fees should only bedischarged by banks.

- Valuation reports shouldalways be addressed and onlydelivered first to the bank thatis advancing the loan funds.






3. Valuer panelmanagement:

There were weaknessesin the appointment,utilization andperformance review ofvaluer panels by banks.This included theutilisation of valuerswithout appropriateexperience, qualificationsand professionalindemnity insurance forthe particular assignment.

- Banks should have aproperly approved panelof valuers usingappropriate selectioncriteria.

- It should have on-goingassessment review ofpanel performanceincluding a review ofprofessional indemnityinsurance.






3. Valuer panelmanagement:

(continue)

There were weaknessesin the appointment,utilization andperformance review ofvaluer panels by creditinstitutions. This includedthe utilisation of valuerswithout appropriateexperience, qualificationsand professionalindemnity insurance forthe particular assignment.

- Banks should ensurethat no one firm ofvaluers has the bulk oftheir valuations.

- Consideration shouldbe given to having noone valuer doing morethan, say, 33% of allvaluation reports.






4. Frequency of valuationreview:

Credit institutionsoften failed toconduct regularvaluations,thereby avoidingthe issue ofrecognizing valuediminutionresulting in under-assessment ofimpairmentprovisions.

- Banks should have clear policyand guidelines governingvaluation frequency, at leastannually.

- Where there has been amaterial change (positive ornegative) to the property by wayof zoning, planning permission,densities, compulsory purchaseorder, transport links, etc. arevised valuation of the propertyshould be sought.






5. Inappropriate use ofinformal valuations:

During the propertylending boom, therewas increasedreliance on informalvaluations by creditinstitutions. Thesewere utilised as ifthey were fullvaluations. Toproperly assess riskduring lendingreviews, fullvaluations arerequired.

- Banks should haveappropriate processes inplace to flag out-datedvaluations and to trigger fullre-valuation. This can be inline with appropriate reviewdates for the loan itself.

- Loan templates shouldprovide a summary of the lasttwo valuations and specificallywhen the last full independentvaluation was done with lessprominence to “informalvaluation updates”.





6. Training wasinadequate:

There wasinadequate trainingregarding collateralvaluationmethodologies,interaction withprofessionalvaluers, theinterpretation ofvaluation reportsand the importanceof valuations incredit riskassessment.

- the knowledge gaps invaluations are identified andclosed out through training.

- the Relationship Managersand Credit Risk staff arespecifically trained in propertyvaluation methods andprocesses.

- Banks should consider theestablishment of in-houseexpertise to inform in-housetraining requirements andstandards.




IV. Property Market and Banking Sector- Cambodia

- GDP growth at 7% in 2014 and estimate at 7% for 2015

- In 2014, Construction sector contributed 17.2% to GDP growth, while real estate

sector contributed about 10.9%.

- The construction and real estate absorb an estimated labor force of about

38,000 to 45,000 workers daily throughout Cambodia, while in Phnom Penh

alone the number is 8,000 to 12,000.

- The growth of the sectors help reduce emigration and push the growth of sub-

sector such as property valuations, management and agency, engineer and

architecture etc.


Property Market

Source: Presentation by H.E Mey Vann, Director General of Financial Industry Department, MoEF, 17th July 2015


- Factors that have driven the real estate market during the last 5 years includes:


Property Market

Source: Presentation by National Bank of Cambodia, 17th July 2015

Growthof RealEstateMarket

Risingmiddle-

income class

Growth ofPopulation and

change ofdemographics

FavorableBusiness and

economicenvironment

Growth ofFDIs

Growth ofCredit

Availability

New law onforeign

ownership ofproperty


- Lending has been growing steadily after the financial crisis 2007-2008


Banking Sector – Loans Outstanding

BalanceOutstanding (US$ in Millions) 2008 2009 2010 2011 2012 2013 2014 June- 2015 2015P

Total Loans 2,409.38 2,512.92 3,226.50 4,377.29 5,947.83 7,469.37 9,530.98 10,676.37 11,959.41

% YoY Change 4.30% 28.40% 35.67% 35.88% 25.58% 27.60% 12.02% 25.48%

Real Estate Sector 545.81 463.55 495.40 739.05 960.97 1,227.34 1,758.05 2,022.14 2,325.89

% YoY Growth -15.07% 6.87% 49.18% 30.03% 27.72% 43.24% 15.02% 32.30%

Of which

Housing 175.50 89.69 116.75 271.40 329.98 398.94 602.50 699.09 811.16

% growth -48.89% 30.17% 132.46% 21.58% 20.90% 51.03% 16.03% 34.63%

Construction 189.61 216.04 227.70 326.05 446.82 577.37 775.28 889.41 1,020.34

% growth 13.94% 5.40% 43.19% 37.04% 29.22% 34.28% 14.72% 31.61%

Others 180.70 158.17 150.59 139.84 183.58 250.53 379.42 433.33 494.90

% growth -12.47% -4.79% -7.14% 31.28% 36.47% 51.45% 14.21% 30.44%

Source: National Bank of Cambodia, Presentation by Kim Vada, 18 August 2015


- High and volatile growth of the property sector

- High non-performing loans (NPL) at 0.25% of the total NPL of 2.66%

- Shadow Banking Operations

- Shortage of long-term capital and liquidity risk

- Relaxed standards of loans underwriting/originations

- Property price overvaluation and speculation

- Lack of data for detailed analysis of the sector


Banking Sector – Challenges for the Real Estate Sector

Source: Presentation by National Bank of Cambodia, 17th July 2015

V. Valuation Standards and Applications - Cambodia

- Multi standards – no standard at all

- Cambodian Valuation Standards – in Khmer

- Prepared by the Financial Industry Department, Ministry of Economy

and Finance (MoEF)

- Consist of 11 standards, 40 pages, no update and focus only on real

property valuations

- Two legal frameworks by the MoEF regarding valuation practices:

- Prakas on the management of valuation services, real estate agency and

management (modified)

- Laws on the management of valuation services and real estate agency

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Valuation Standards

V. Valuation Standards and Applications - Cambodia

- Cambodian Valuers and Estate Association (CVEA) is working with Asean

Valuation Association (AVA) to promote “One ASEAN, One Valuation

Standard”

- CVEA has signed MoU with its counterparts from Singapore and Malaysia

as well as RICS regarding training in the property sector

- There is no minimum CPD training requirements for valuers


Valuation Standards

V. Valuation Standards and Applications in Cambodia

- Mostly Valuations for Secured Lending

- The need for valuation for financial reporting is growing gradually as

Cambodia is adopting the IFRSs, with some modifications, for applications

to both listed and unlisted firms

- There are 134 licensed real estate agency and valuation firms, of which

87 are members of CVEA as of February 2016 (source: CVEA)

- There are 70 certified valuers recognized by the MoEF as of August 2015

(source: MoEF)


Valuation Applications

V. Valuation Standards and Applications in Cambodia

- Only few big valuation firms are able to acquire Professional Indemnity

Insurance

- Current Lending Practices –

- Relaxed Standards of Loan Underwriting (some institutions)

(Presentation by Kim Vada, National Bank of Cambodia, 18th August

2005 at Cambodiana Hotel)

- Valuation for Secured Lending is characterized by weaknesses as

described in the Case Study and the IVS White Paper -valuations in

emerging markets


Valuation Applications


- RICS was created in 1868 in the United

Kingdom and is the world's leading

professional body for qualifications and

standards in land, property and construction.

- International headquarters in London, with

world regional offices in Brussels, Dubai, Hong

Kong, New York and Sydney

- Over 100,000 qualified members in over 146

countries

- 500 industry research and policy papers

published every year


The Red Book


• RICS Professional Standards (PS) – Mandatory

• PS1 – Compliance with standards and practice statements where a writtenvaluation is provided.

• PS2 – Ethics, competency, objectivity and disclosures

• RICS Global Valuation Practice Statements (VPS) – Mandatory

• VPS 1 – Minimum terms of engagement; VPS 2 – Inspections and investigations;VPS 3 – Valuation reports; VPS 4 – Bases of value, assumptions and specialassumptions

• Valuation Practice Guidance- Application (VPGA)

• Valuation for Secured Lending and Financial Reporting

• Subjects of valuation include real property, plant and equipment, BusinessValuation, trade-related property, intangible assets, portfolio of properties.


Outline of the Red Book


• Introduction

• The IVS Framework

• IVS General Standards

• IVS Asset Standards

• IVS Valuation Applications for Financial Reporting

and Secured Lending

• Technical Information Papers on valuations of subject property such as real

property, plant and equipment, Business Valuation, Investment property

under construction, trade-related property, intangible assets, financial

Instruments,


Outline of The White Book (IVS)

V. Conclusion• The growth of property and financial sectors as well as the increasing numbers

of valuation practicing firms call for the discipline and professionalism in

valuation practices

• The introduction and implementation of sound valuation standards are essential

to the consolidation, sustainability, transparency, efficiency of property and

financial markets in Cambodia.

• Cambodia needs professional standards that can:

• Protect clients and consumers through a strict code of ethics

• Provide impartial advice, analysis and guidance to valuers

• Ensure quality of valuations and creditability of valuers

• Provide consistency and comparability across markets

• Cover beyond real property


V. Conclusion• Policy makers may need an updated local standards, incorporating

internationally recognized ones such as The Red Book or The White Book

or completely adopt the books with minimal modifications like the case of

Cambodian accounting standards

• The regulators, in collaboration with CVEA, should develop appropriate

regulations for full implementation of the adopted standards which should

cover valuation practices beyond property

• Publicly accessible central market database should be initiated

• CVEA needs to be entrusted with more membership regulatory authority

in maintaining the highest educational and professional standards


V. Conclusion• CVEA and the Ministry should work in continually upgrading valuer’s

knowledge through minimum hours CPD requirements

• CVEA and the regulators should encourage more valuation training

courses in schools, universities, associations.

• Banks and other lending institutions should enforce the best practices

valuations for secured lending.

• In addition, banks, especially local banks, should consider the best

practices recommendations set out in the case study in order to improve

its loan origination or underwriting and risk management process.


Thank You !About Vtrust Appraisal Co., Ltd:

- Real Property Valuations

- Plant, Machinery & Equipment

- Business Valuation

- Hotel Valuation

- Pre-IPO Valuation

- Research & Consultancy - Real Estate Projects


Real estate market conference-valuation

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