Know Your Stuff: The common  factors valuers look at in appraising a property

This article first appeared in City & Country, The Edge Malaysia Weekly, on July 26, 2021 - August 01, 2021.
The common  factors valuers look at in appraising a property

The common  factors valuers look at in appraising a property

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Whether you are a house buyer or seller on the secondary market, you would have come across a phrase called “property valuation”, which means appraising a property and estimating its worth. Have you ever wondered what factors affect property valuation?

Knight Frank Malaysia executive director of valuation and advisory Justin Chee emphasises the importance of property valuation when it comes to selling a property because it will determine its estimated value at a particular point in time, which will in turn guide the owner on how much to ask for and the kind of offer that he or she should accept.

There are three main approaches to valuation, namely comparison, income and cost. Different types of properties will have different factors that affect their property valuation.

“For typical residential properties, the most commonly used approach is the comparison approach, where valuers will use the data on recently transacted properties within the same/similar location and compare that with the property being valued. Differences based on a set of factors are then accounted for in the analysis,” he tells City & Country.

As for income-generating properties, Chee says there are other factors involved such as the rental receivable or existing commercial tenancy structure in place, as the primary approach of valuation for these properties would be the income approach via the investment method or discounted cash flow method.

This means that the valuation will take into consideration the current contractual rental as well as the potential fair market rental that can be achieved by the property. Valuers will then capitalise such net income using an appropriate market-derived return or yield, he adds.

The common approach used for land transactions is the comparison approach, but Chee notes that for land with development approval, the income approach using the residual method is more commonly used. This is done by determining the potential gross development value (GDV) of the proposed development as well as the gross development cost (GDC) to undertake it. 

“The difference [between GDV and GDC] is known as the residual land value, which will then be discounted at a particular rate to reflect the current market situation, the development period, as well as the absorption rate of the project to reflect the residual land value as at the date of valuation,” he says.

Other common factors valuers usually look at include location, accessibility, infrastructure availability, size/built-up, design, finishing, shape, tenure as well as features located nearby. Knight Frank Kota Kinabalu branch executive director Alexel Chen notes that other macro factors, including the current market sentiment, government initiatives such as the Home Ownership Campaign and the Real Property Gains Tax (RPGT) need to be considered as well.

“These factors and others help us to frame the subject property and compare it in the right context to derive a market value,” he says.

As no two properties are the same, there are no fixed regimes to property valuation — it is an assessment that marries both art and science as it takes into account the property’s characteristics and macro factors, among others.

As a diverse country with citizens of different ethnicities, cultural belief also plays a role in property valuation. Knight Frank Johor branch director Debbie Choy says these cultural-related factors include T-junctions, road curves, the direction a property faces, proximity to certain amenities and infrastructure, floor numbers and unit numbers.

She notes that various studies have determined the impact of purchasers’ cultural beliefs on the property purchasing process. The diverse backgrounds of Malaysians also mean that some beliefs are more significant than others.

“The significant ones that may have a negative impact on valuation include houses located at T-junctions and those facing or in close proximity to unfavourable infrastructure such as substations, pylons and sewerage plants. Depending on the purchasers’ background, less significant ones — such as the level the unit is at, home address numbers and the direction the property faces — do not affect the valuation process,” she explains.

There are also other factors affecting property values, such as the conditions stated on land titles. This includes the condition that a unit is reserved for bumiputera. Choy explains that this represents a limited pool of purchasers on the secondary market, and thus reduces the property’s value.

In selling their homes, Chee advises property owners to appoint licensed real estate negotiators and valuers who can advise them on the actual market situation in terms of asking price, market value, potential of the property, occupancy rate and rental.

One should also avoid some common mistakes when it comes to selling properties. Owners looking to sell should know the costs that will be incurred during the process, such as agent’s fees, stamp duty, RPGT and other taxes and incentives by banks or the government.

“Also, a lot of homeowners and investors think that they can recoup their initial renovation or ID (interior design) costs in full by adding them into the asking price of the house upon selling. However, most of the time, they won’t be able to. It is always a huge mistake to overcapitalise your property according to your preferences and tastes, unless it is for your own stay for the long term,” says Chee.

“Factors such as depreciation, design types, shapes and the theme of the ID all play a role in whether the potential buyer will like the property and then pay the additional premium for it. 

“Therefore, investors who are into purchasing older properties to refurbish and resell tend to design them in a more evergreen and contemporary way to appeal to a larger group of buyers.”