METHODS

OF VALUATION
(Kaedah-kaedah Penilaian)
Lecture 6:

INVESTMENT METHOD
(Kaedah Pelaburan)
Mokhtar bin Omar
28 June 2021
 VALUATION
(As defined by the Malaysian Valuation Standard (MVS)

MVS 6th Edition 2019:

The written opinion as to capital or rental value on any
given basis in respect of an interest in property with or
without assumptions or qualifications. The term shall
include revaluation.

Pendapat bertulis mengenai nilai modal atau sewa atas sebarang

asas tertentu mengenai suatu kepentingan dalam harta tanah
dengan atau tanpa andaian atau kelayakan. Istilah ini juga
merangkumi penilaian semula.
 VALUATION
(With reference to the Malaysian Valuation Standard (MVS)

Definition of Valuation
An art and science of estimating the value for a specific purpose
of a particular interest in property at a particular moment in time,
taking into account all the features of the property and also
considering all the underlying economic factors of the market,
including the range of alternative investments.

Satu seni dan sains dalam menganggarkan nilai untuk maksud khusus
terhadap kepentingan tertentu dalam harta tanah pada masa tetentu,
dengan mengambilkira semua ciri harta tanah itu dan juga
mempertimbangkan semua faktor ekonomi pasaran yang
mempengaruhinya, termasuk pelbagai pelaburan sebaliknya.
 INVESTMENT
Definition of Investment
“An investment is any asset which is acquired for the
purpose of earning a future gain, either by means of a
flow of income or a growth of capital or by a
combination of both over a period of time”.

“Pelaburan bagi aset yang dimiliki adalah bertujuan bagi

memperoleh pendapatan pada masa akan datang samada
dalam bentuk wang masuk atau pengembangan nilai
modal atau kedua dua nya dalam tempoh yang tertentu”
Investment:
 the giving up of a present capital sum for a
future flow of income
 the income flow is a percentage return on
the capital invested
 Examples: savings deposit, purchasing
shares, bonds, unit trusts and property
Characteristic Of A Good Investment

 Security of capital
 Security of income
 Regularity of income
 Easy & low management cost
 Low cost of purchase
 Conveniently liquidity
 Good hedge against inflation
 Capital appreciation
Characteristics Of Real Estate
 Advantages

Security of capital
Income is certain & secure – rental
Hedge against inflation
Capital appreciation
 Disadvantages

Require large capital outlay

Less liquid
Management is onerous & costly
High cost of purchase
Real Property Interest
 Can be in two different tenures

 Freehold –
• The owner has perpetual interest in the
property & entitled to the income derived from
it forever

 Leasehold arises from freehold –

• Freehold owner can give a certain period of
years of his land to somebody
• The leasehold (lessee) is given in consideration
for the payment of rent to the lessor
 Investment Method
Of Valuation

 The present worth of discounting future

incomes at an appropriate rate of return

 The present capital value of the future flows

of rental income discounted at an appropriate
rate of return
 Investment Method
 
 It is a method used to value properties which
are income (rental) producing

 The method is a process in which the future

flows of net rental income is converted to a
capital value
 Investment Method
 
The mathematical formula:-
Net Rent per annum RM x
(x) Years Purchase (YP) y
Capital Value RM xy

Where Net Rent = Gross Rent less (-) Outgoings

 Years Purchase is the multiplier which
discounts the income flow at an appropriate
rate over the number of years to obtain the
Capital Value invested

Years Purchase (YP) = 100

i
Where i = rate return from the property, yield,
capitalization rate

therefore Years Purchase is inversely related to

yield or rate of return
 Investment Method
Information required to carry out investment
method of valuation:

 Rent

 Outgoings

 Yield/Rate of Return
 Rental/Income

The amount of money collected by
a landlord from a tenant
or group of tenants for using a particular space
 Rental Value
What is rental value?
 Is the amount that a prospective tenant can

afford to pay for its occupation

 The purpose of the occupation could be for

(a) making a profit from the occupation
e.g. retail lots, office space etc.
(b) occupation as a dwelling unit
e.g. a residential house
(a) making a profit
The value of occupation to the tenant will
be dependent on what he can earn from
carrying activities on the space

If rent is dependent on profit, it will be

affected by the economic state of the
country and many characteristics of the
land and property
(b) occupation as a dwelling unit
In the case of residential property, occupation
is a need and does not usually serve a profit-
making function

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 GROSS RENT
RENT where the Landlords bears all the outgoings

NET RENT
RENT where the Tenant bears all the outgoings
 OUTGOINGS
Money spent to pay for the expenses in preserving
the right in the property ownership as well and the
economic value of property

1. Repairs (Internal / External)

2. Management
3. Tax
4. Insurance
 Outgoings
(a) Internal repair / External Repair
(b) Insurance / Fire
(c) Management
(d) Assessment rate
(e) Quit rent
(f) Sewerage rate (IWK rates)
(g) Service charge / Maintenance fees
 FRV Full Rental Value

Estimated Rent that can be contracted in

the present market condition, at the date
of valuation
 RENT RESERVED
Is the rent that has been contracted for a
specific period leased. The rent will remain
effective until the leased expires.

RACK RENT
Is the rent contracted at the full rental value
 How the rack rental value of a property is
determined
(a) By reference to the rent currently being paid
But this approach may only provide a
reasonable guide to market rental because the
rental paid could be less than the market rental
due to :
1. rental was fixed at a date in the past

2. non-arm’s length relationship (special

relationship) between landlord & tenant
3. a capital sum known as premium was paid
(b)By comparison with similar property
− need to make adjustments to the rental due
to properties being heterogeneous
− the unit of comparison will vary according
to the type of land and property:
 RM per acre – agricultural property, land

 RM per sq ft or RM per sq m –

residential, retail, office, industrial

properties
(c) By considering rent as proportion of
turnover or profit
A prospective tenant of a commercial
property will calculate his likely turnover,
costs, an allowance for interest on capital
employed in the business, salary and rates.

The balance will represent profit and he will

then determine the portion of this to be
allocated to rent.
 Hence prospective tenants may differ in the
way that they calculate the rent that they are
prepared to pay with resultant variations in
the figures obtained

 The rent eventually paid would be dependent

upon the level of demand for the occupancy of
the property
(d)By relating the rent to the cost

The rental will comprise an annual

return for the use of the land itself and
an annual repayment for the cost of
the building which should be
appropriate on the capital outlay.

But this method is calculated based on

landlord’s expectations & not necessarily what
those in the market would be prepared to pay.
TYPE of Leases
 Full Repair and Insurance (FRI)

Rent received by the landlord is the net rent and

all the outgoings are borne by the lessee (tenant)

FRI lease = triple net lease (in USA)

[Tenant pays quoted rate plus all expenses
- usually involves single tenant on a single building]
Internal Repair and Insurance (IRI)

Tenant is responsible for the

internal repair and insurance
only. Other outgoings will be
borne by the lessee.
Internal Repair Only (IR0)

Tenant is responsible for the

internal repair only. Other
outgoings will be borne by the
lessor
 Ground lease
Where a freeholder grants a lease of building land
to a lessee for a long period e.g. 99 years

The rent paid i.e. ground rent will be for the use of
the land only and the lessee may erect buildings
upon the land for own occupation or for subletting
 Occupation lease
A lease granted for the occupation of land/or
buildings
 Terms relating to leases
 Term of the lease – the rent would be fixed for
the term of the lease. The rent will be reviewed
under rent review before the term expires.

 Upward only review – the new rent will be

revised to a higher rental during rent review

 Reversion - Upon expiration of the period of

the lease, the property reverts to the lease
grantor 
 ANALYSIS OF RENTAL VALUE /
YIELD

Conduct analysis to ascertain:

− Rental Value/Rental rate (psf/ psm)
Where making an adjustment to the
Time, Location, Floor Level
*use zoning method if possible
 Gross and net yields
 Gross yield =
gross monthly rental x 12 months x 100%
purchase price / market value

 Net yield =
(gross monthly rental x 12 months) – outgoings pa x
100%
purchase price / market value
DETERMINING MARKET RENT

Rent is the most important component.

The characteristics of the market rent for
comparisons are:
 It must be recent
 It must be bona fide rent
 It must be for a similar type of property
 It must be in same locality
 The terms of rental is similar i.e. gross rent

 It must not include payment for other

purposes/facilities such as furniture
 Itmust have same area, accommodation design
and layout etc.
 The term or period of tenancy must be similar

 Make adjustments for dissimilarities

DETERMINING OUTGOINGS

 Records on outgoings
 Maintenance/Repair records kept by owner
 Assessment records from local authority
 Quit rent payable
 Fire Insurance premium from insurance company
 Management fees as prescribed by professional bodies
like RISM, BOVEAP or other regulatory bodies
DETERMINING RATE OF RETURN

 Rate of return or yield is obtained through

analysis of income & capital values of
comparable property
 Ifthe capital value and rental value are known,
then the yield can be calculated
 Rate of Return (ROR)
 Scheduled Rate of Return for Properties
Rate of Return
Property (%)
Residential 4–7
Commercial/ Retail 6–9
Office 6–9
Industry 8 – 14
Special Properties 10 – 18
Agriculture 8 – 12
Ground Rent 3-5
VALUATION OF LEASEHOLD INTEREST
Creation of interest
Interest Ownership
Freehold Freeholder
30 years lease  

Head Lease Head Leaseholder

20 years lease  

Sub Lease Sub Leaseholder

15 years lease
 
Sub sublease Sub subleaseholder
 Investment Method of Valuation
The investment method of
valuation consists of 2 RM
different parts which are
the TERM and also
REVERSION. FRV
p.a.

 Term: During the rental

period, a tenant pay Net REVERSION
sum of rental to the Rent
p.a. TERM
property owner
 Reversion: When the Date Of End Of
Start Of
rental term has expired, Lease Valuation Lease
the property will go n period
back to the owner.
 Investment Method of Valuation
 The steps of this method of valuation are as follows:
 For the calculation of the TERMS
1. Determine the rental value of the property
2. If the rent given is GROSS RENT p.a., you have to deduct
the outgoings. Outgoings are:
 Repairs/Maintenance
 Assessment/Rates
 Quit Rent
 Fire Insurance
 Management Fee

3. The amount of rent that has been deducted with the outgoings
will be known as NET RENT p.a.
4. The NET RENT p.a. should be multiplied with the YP
SINGLE RATE (1 - PV/i)
 For calculation of Reversion
1. Determine the amount of Full Rental Value (FRV) of
the Property
2. The FRV of the property will be multiplied with YP in
PERPETUITY AND with PRESENT VALUE
3. OR the FRV multiplied with YP in PERP DEFFERED
 So, in the determination of Market Value; the
value of the TERM will be added with the
value in the REVERSION

 MARKET VALUE = TERM + REVERSION

 YEARS PURCHASE @
PRESENT VALUE OF RM1 PER ANNUM
(take note that a YP is a multiplier)
• This is a present value of the right to receive RM1 at
the end of each year at i compound interest
• The formula is derived from the addition of present
value of RM1 for each RM1 received

• Formula: YP = 1 – PV
i
= 1 – [1/(1 + i)^n ]
i
 Example
 A landlord will receive RM100 per annum rent
from his tenant for the next 20 years.
Assuming 8% compound interest, what is the
capital value of the income?
Formula: YP = 1 – PV
i
= 1 – [1/(1 + i)^n ] x RM100
i
= 1 – 1/(1 + 0.08)^20 x RM100
0.08
= 1 – 1/4.6610 x RM100
0.08
= RM981.82
 YEARS PURCHASE IN
PERPETUITY
 This is the present value of the right to
receive RM1 at the end of each year in
perpetuity at i compound interest
 This differs from previous table in that the
income is received not for a limited period
of time but for perpetuity, that is an endless
period of time
 Formula: YP in perp = 1/i
 Example
 Ali Baba is the owner of a freehold interest
in a shop with a net income at RM250 per
annum. Assuming 7% compound interest,
calculate the capital value of Ali Baba’s
interest?
 Formula: YP in perp = 1/i

 1/0.07 x RM250
= 14.2857 x RM250
= RM3,571.43
YEARS PURCHASE REVERSION TO A
PERPETUITY (YP in Perp Defered)
 This is the. present value of the right to
receive RM1 at the end of each year in
perpetuity at i compound interest but
receivable after the expiration of n years
 Formula:
YP in perp deffered = 1
i (A)
= 1
i (1 + i)^n
 Example
 The owner of freehold property will receive
net income of RM275 per annum
commencing in 4 years time. Assuming a
return of 8%, value his interest.
 EXAMPLE OF VALUATION:

a) Freehold
Value a freehold 3-storey intermediate shop
office and monthly gross rent as below:
Investment Method
 Investment Method
EXAMPLE OF VALUATION:
b) Valuation using YP single rate
 
Formula: YP = 1 - PV
i
 Where PV = 1/(1+ i)n

Used to value an interest for a certain term (subsisting lease)

Example:
A freehold 3-storey intermediate shop-office was let on a 7 years
lease 3 years ago for a gross rent of RM50,000 p.a. The current
rental value of the property is RM78,000 p.a. gross. Determine
the Current Value of the freehold interest.
Valuation
Existing 4 years lease

Gross Rent received p.a RM50,000 

(less): Outgoings p.a
Repairs(internal/external) }
Assessment Rates }
Fire Insurance Premium } 25%
Quit Rent }
Property Management }
RM12,500
Net Rent p.a. RM37,500
(x)YP for 4 years @ 6% *
* i.e. 1-PV/i

= (1-(1/(1+0.06)4))/0.06
= (1-0.79209)/0.06
= 0.20791/0.06 3.4651
RM129,911
Reversion to Perpetuity
 
Gross Rental Value p.a. RM78,000
(less): Outgoings p.a. (as above) RM19,500
Net Rent p.a. RM58,500
 
YP in perpetuity deferred
4 years @ 7%
1/(iA)
= 1/(0.07(1+0.07)4
= 1/(0.07(1.3108)
= 1/0.09175 10.8991

RM637,597
Capital Value RM767,538
 
say RM768,000
 EXAMPLE 1

Value the freehold interest in a commercial

property recently let for 10 years at RM18,000 per
annum net.

A similar property in the area was recently sold at

RM240,000. The rental value of similar
commercial property in the area is RM15,000 per
annum net.
 EXERCISE 2
A freehold commercial property was recently
leased at the net market rental of RM12,000 per
month. The expected investment yield is at 6%
per annum. Determine the capital value of the
property.
 EXERCISE 3
Mr Aiman is the owner of a freehold double-storey terrace house in
Putrajaya. He rented the house to Miss Jasmin for a 10 year lease. The lease
started on 1st September 2016 for a rent of RM1,500 per month (gross). The
Full Rental Value is RM20,000 per annum (net).

The outgoings of the properties are as follows:

1. Assessment Rate RM1,000 pa
2. Insurance RM100 pm
3. Quit Rent RM200 pa
4. Maintenance and Repairs RM800 pa
5. Management RM80 pm

The current Rate of Return (ROR) of similar properties in the vicinity is 6%

per annum.

Value Mr Aiman’s interest as at 1st September 2020 using the Investment

Method of Valuation.
 EXERCISE 4
Mr Aliff is the owner of a freehold double-storey shophouse in Putrajaya.
He rented the shop house to Miss Atikah for a 7 year lease. The lease started
on 1st September 2017 for a rent of RM6,000 per month (gross). The Full
Rental Value is RM85,000 per annum (gross).

The outgoings of the properties are as follows:

1. Assessment Rate RM5,000 pa
2. Insurance RM250 pm
3. Quit Rent RM300 pa
4. Maintenance and Repairs RM1,000 pa
5. Management RM150 pm

The current Rate of Return (ROR) of similar properties in the vicinity is 6.5%
per annum.

Value Mr Aliff’s interest as at 1st September 2020 using the Investment

Method of Valuation.
 EXERCISE 5

The net rent receivable for a 2-storey freehold

house is as follows:
 For the first 15 years - RM36,000 per annum

 From the 16th year onwards - RM42,000 per

annum
Calculate the value of the subject property where
the rate of return for similar properties is at 5.5%.
THANK YOU
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