1. CHAPTER 1
The vital credo for most of all business is property or real estate valuation. Land and
property are factors of production and, as with any other asset, the value of the land
flows from the use to which it is put, and that in turn, is dependent on the demand (and
supply) for the product that is produced (Nick French, 2004). Valuation, in its simplest
form is the determination of amount for which the property will transact on a particular
date (Stephen Sykes, 1984). Will Fraser (1985) state thatfor any valuation model to have
validity it must produce an accurate estimate of the market price. Then, he added, the
model should therefore reflect the market culture and conditions at the time of the
valuation. It should be remembered that the model should be a representation of the
underlying fundamentals of the market and that the resulting figure of the valuation is
Valuations that are in accordance with the Islamic Principles are called Shari‟ahcompliant valuation. There are three principal rules which need to be adhered to when
analyzing valuation or activities from the standpoint of Shari‟ah permissibility. These
three principal rules were generated by Chris Cook (2006) in Islamic financial view-point
which also pointed out by Mohd Rahimie (2010) in Islamic fund Valuation study, hence it
is logically applied in valuation of property process. The first is the absence of interest
(riba‟) in the valuation. The second is the potential for „unethical concerns‟ in the
valuation which includes halal or non-halal property usage. The closing part associate
with the essence of the contract between parties involved. Any contract shortcoming to
2. fasten down its principal elements (examples; price, subject matter, delivery date and
others) in a mode in which the uncertainty might become reasons of potential conflicts
between contracting parties is at fault of holding outrageous/absolute Gharar (also
known as unacceptable uncertainty) and is null and void according to Shari‟ah context.
Byrne (1989) and Aydin & Rainer (2010) had suggested that all Valuers are aware that
inputs and output from appraisal and valuations are uncertain and suggest the essential
to allocate the uncertainty known. After in-depth study done on various sources,
uncertainty (Gharar) existed in valuation methods were reason out in few articles, hence
these principal rules will be examine in valuation on whether it is permissible according
to Islam or not and getting more understanding on the usage of risk-free risk rate as the
benchmark in property valuation method is halal according to Islam and future views on
its application according to uncertainty lies within it.
The study had its prime interest since it related back to what had been earned
(fee accepted) by the Muslim Professional in Valuation private practice since it is based
on the percentage of total valuation done on subject property entitled. According to
Abdullah ibn Masud, Radi-Allahu anhu, The Prophet Muhammad (P.B.U.H.) said:
„Seeking halal earning is a duty after the duty.‟ In other words working to earn a halal
living is itself a religious obligation second in importance after the primary religious
obligations like prayers, fasting and hajj. Hence, seeking and knowing halal legality in
our fee or salary is a must.
Modern Scholars began thinking about Shari‟ah Compliant necessity in the
second half of the century, and to a lesser extent Gharar (uncertainty), and on their
economic and social impact. The main question of whether the prevailing fixed,
predetermined rate of interest on loans in conventional banking constituted riba‟ was
3. debated well into the 1980s, when a consensus was reached among scholars that
indeed the prohibition did include such interest receipts or payments. Increasing demand
for Islamic financial products and services which also includes real estate valuation for
mortgage and the increasing number of people seeking halal means and sources of
business dealing stimulated further research on intermediation and real estate finance
(Askari, Iqbal, & Mirakhor, 2009). And this rate is part of the benchmark in property
valuation method and this lead to the question, the original reason for the input of such
rate in valuation and whether the uncertainty elements from the rate constitute any
possibilities towards permissibility in Shari‟ah principles.
Very few studies had been done by researcher in Shari‟ah compliant valuation.
But, it came into limelight when this area had been discussed in the First International
Conference on Real estate Valuation by Qatar Islamic Bank and CB Richard Ellis
(CBRE), a commercial real estate services firm in Qatar organised early this year (2012),
the session covered the legal and Shari‟ah aspects of valuation, including the legal
liability in the real estate valuation process, the use of valuation in a Shari‟ah compliance
context and the legal considerations in the ownership of real Estate which a professional
Valuer must understand. Valuation uses in disputes and litigation also be addressed
including industry best practice and process and their relation to Shari‟ah principles.
Thus, this research added to fill the gap for more understanding and inputs on this
relatively new field of valuation.
In recent renown interest-free finance sector which had been actively promoted
with diverse package offered by the Islamic Banking or Financial Institution had
successfully attract Malaysian in opt for this type of financing rather than the
conventional one.Nowadays, there exist 267 Islamic banks and financial institutions all
4. over the world working under the Islamic finance principle as stated by Tarek H.Selim
(2008). Those institutions are located in about forty-eight countries with value of assets
of $260 billion and with an average growth rate of 23 per cent annually (Dubai Islamic
Bank, 2005). Hence, interest and promotion of Islamic financial products and institutions
is welcomed all over the world because it offers diversity of alternatives for investors and
consumers alike (Jomo, 1992). But very little Shari‟ah-compliant valuation method being
sudy, it cannot be disregard since the finance industry especially mortgage property
financing backed with a sound property valuation. Valuation which merely being develop
from the finance industry especially for private Valuers had create some awareness on
producing valuation report that fulfill Islamic Principles. What are the areas in valuation
methods does not permissible by Islamic principles? Therefore, prevailing factors in
determining Shari‟ah compliant valuation method had to be address or detailed out in a
1.0 BACKGROUND OF THE RESEARCH
Perhaps the single most important factor behind the powerful growth of the Shariahcompliant funds industry lies in the simple fact that Muslims represent about a quarter of
the world‟s population (pp.5)
This statement made towards the fund industry development. The statement also
make one wonder, as a person in newly-aware with Shari‟ah compliance importance, it
is a realistic dream to prospect such level of growth in valuation practice. There were not
much studies or report in regard of Shari‟ah-compliant fulfillment in valuation practice.
Since, in the real estate business, however, it is very common to face cases of mixed
activities, i.e., permissible and non-permissible activities occurring together. In
5. generating ideas for this research, probably it will be seen as a selfish remark, since the
original intention in coming up with the objective of this research were from own curiosity
and desire to know does the existing valuation fulfill the Islamic principle? Does the
interest applied in valuation method used is riba‟ as pertinently mentioned by few
academician met were true? Hence, the basis of idea being acknowledged and
considered. Afterwards, with some reviews and reading on development of Shari‟ah
compliant valuation model, there were needs to establish one reference for in depth
study on factors in determining Shari‟ah compliant valuation model and critical views on
the non-compliance of existence valuation model.
The light of the questions on the importance of this study also came from the
findings made by Muhammad Hanif (2010), he made a minor modification of risk free
return in his attempt to develop a Shari‟ah compliant pricing model. Aydin & Rainer
(2010) made critical review on the concept and mathematics of Islamic valuation with a
suggestion on changes of riba‟ in function of valuation and inclusion of inflation of
currencies, in particular they stressed out the avoidance of ribā and Gharar which
literally defined as uncertainty should be applied to real economic value in the first place
rather than the valuation industry itself.
They also argue that ribā and Gharar may easily arise through neglect of risk or
inappropriate valuation methods but there are no detailed explanatory on whereabouts
of concrete validity on the existence of riba or Gharar in the valuation model. Thus, this
research looking forward for these factors to evolve in factual evidence analysis. Since,
there is not much research or study related in the market, this research is truthfully an
6. Specific mind-consciousness on the views from the people worked in the industry
and the academician raised few questions on regard of this topic, “what is wrong with the
existing valuation model use? Does it have issue with the Islamic principles?” In addition,
according to Bruner et al. (2002), valuations are affected by factors such as liquidity,
corruption, volatility and taxes, which differ between developing markets and developed
markets. Thus, does this factors partly considered in determining Shari‟ah compliant
valuation model? Emphasizing the views from the interviewee on the validity of
uncertainty and possibility of riba‟ existence in valuation methods and suggestive
measure to concur the Shari‟ah compliance valuation with correlation with the critical
review on the current valuation model would be highlighted through out the research.
1.1 STATEMENT OF THE PROBLEM
Rate in Valuation Method (VM), eventually generated from prevailing interest rate
in market with addition of risk premium. Doubtly, some say this interest rate is riba‟
(Minsky, 1982; Kamal et. Al, 2010; Febianto, 2010; Thajudeen, 2012), some were not
(refer to Fazlur Rehman, 1960; Sayyid Tantawi, 1989) but there are limited justification
on the relationship of riba‟ with rated applied in deriving value of property based on
method applicable. While uncertainty is due to the lack of knowledge and poor or
imperfect information about all the input that can be used in the analysis. In the context
of valuation this refers to the input variable, the comparable information. French &
Gabrielli (2004) suggest more work will be required to agree on issues of uncertainty in
valuation, they claimed supported with others report and study (Byrne, Mallison,
Carsberg et.al.), as noted earlier, absolute uncertainty or „absolute Gharar‟ is
impermissible under Shari‟ah principles. But does the uncertainty in valuation is actually
absolute Gharar as according to Syari‟ah law definition? Normal uncertainty is an
7. unsurprising fact of property valuation. Hence, does normal uncertainty permissible in
Islam by fact of its nature in valuation practice? But, what are the uncertainties that will
affect the valuation output? How about abnormal uncertainty? The fact that there are
uncertainties doubtly being reported to aide the valuation users understanding of the
valuation. Does the reporting of uncertainty acceptable in Islam? Since, prescribing is
one of the solutions to give justice towards valuation users hence the permissibility had
Moreover, other factors in determining a Shari‟ah compliant validity in valuation
other than riba‟ and Gharar could also be discuss as such, the timelessness of value as
suggested by Islam according to Aydin & Rainer (2010) which not being considered
under current valuation process. Undeniably, time is a one of the main principle in
deriving valuation as being done for the past since valuation service existed. But the
timelessness of value does not discuss in this study. Moreover, a reference on the
reviews of existence valuation with compatibility of Shari‟ah complaint principles can be
allocated in this study.
1.2 AIM OF THE STUDY
There are two primary aims of this study, namely to validate the potential of nonShari‟ah compliance in existing valuation applied by industry practitioner and to enrich
knowledge and information on regard of the possible variables that affect the adherence
of Valuation specification towards Shari‟ah Principles.
8. 1.3 OBJECTIVE OF THE STUDY
The main objectives of this study are:
To review and analyse Gharar (uncertainty) in property valuation methods.
The factors will also include presumably factors stated in previous research or
study. This study also attempts to examine whether factors of Shari‟ah compliant
exhibits certain recognisable trends as reported by previous studies. Therefore,
more robust and independent results of the possible factors in determining
Shari‟ah compliant valuation can be achieved by this study.
To evaluate whether the existence of uncertainty and risk-free rate in
property valuation method are permissible according to Islam
The examination will be done in reviewing process by employing open ended
discussion towards perception of the panels whom undergone thorough study on
the area-related. The comprehensive justification will also unlock the issues
surrounding Islamic perspective in valuation.
1.4 SIGNIFICANCE OF THE STUDY
In spite of there are growth of Islamic-perceptive in financing and capital market
industry worldwide, literature on Shari‟ah compliant valuation and its practicality,
unfortunately, still deemed to be rather limited. Moreover, past studies have mainly
based their analysis upon valuation of capital asset of financing instrument, barely very
9. few were based on the physical property itself. Hence, the findings were valuable in
giving ideas of possible factors of non-Shari‟ah compliance in this industry since
valuation property have diverse correlated with financial market but noted that the
findings are generally varied and inconclusive due to various limitations and
shortcomings since it involved different target and scope in the methodologies employed
by past studies.
This study on the other hand, attempts to investigate the issues surrounding
existence valuation, whether it is fulfill Islamic principles or not. First,the study seeks to
investigate the existing valuation applied by practitioner compatibility with Islamic
principles by reviewing the uncertainty remark by various researcher and author.
Secondly,the existence of uncertainty in property valuation is examined using openended discussion with selected panels. Thirdly, through having discussion with panels in
Shari‟ah, uncertainty will be evaluate their occurrence in property valuation practice with
Islamic principles. Lastly, through the comprehensive understanding of the profile and
operations of existing valuation with Islamic principles, this study attempts to suggest the
appropriate course of actions to comprehend the situation for the development
ofShari‟ah-compliant property valuation method.
The input from the panels is an added advantage of this study as it complements
the qualitative analysis by broadening the scope of this study, enhancing the depth of
the analysis and offers advance perspective to the issues at hand. Therefore, this study
is crucial since it helps to enrich the quality of research on Shari‟ah-compliant valuation
method and paves the way for future research on the development of an alternative
valuation model appropriate under Islamic perspective.
10. 1.4.1 Why we need? – Faith relevance
Contrary to conventional valuation however, a pious or ethically-motivated
Muslim Valuer or Muslim industry-relater player is supposedly looking beyond the
mere profit maximisation objectives when doing their work scope. Instead, Islam
encourages its followers to create and accumulate wealth as long as the wealth is
obtained through legitimate means. Thus, although profit maximisation is allowed
in Islam, it should not be perceived as the ultimate objective by Muslim that would
potentially undermining their other religious obligations, or as the one that will
justify any means for its achievement (Mohd Rahimie, 2010). Islamic teachings do
not only place emphases on wealth creation and accumulation but are equally
concerned with the manner of how the wealth is utilised.
With this understanding in mind, it can be argued that the expected utility
function of a pious Muslim Valuer or related practitioner should be different from
the utility function of a conventional Valuer or related practitioner since the former
will take into consideration his religious belief and constraints when making an
investment whilst the latter‟s main concern would naturally be about the expected
monetary reward from his/her work merely. Subsequently, there is a concern that
Shari‟ahrestrictions may have somehow affected the return towards their scope of
work unfavorably. By eliminating non-halal potential valuation from their workscope, it will certainly be deprived from enjoying the profit potential offered by nonhalal potential valuation, thus making the religious practitioner rather less
competitive in terms of their potential profit making as compared to conventional
practitioner. Moreover, such definite restrictions and characteristics of non-Shari‟ah
compliant valuation has not theoretically and practically undermine and as
mentioned earlier it is merely new in the industry.
11. In so far as modern portfolio theory is concerned, it has been argued that
such restrictions, although religiously or ethically correct, will not be acceptable
(see Kurtz, 2005). Hence, it is ultimate to continue studies on the need of it as part
of main concern for continuity in seeking answer of all curiosity regarding validity of
our valuation in Islamic perspective.
1.5 SCOPE AND LIMITATION
This section highlights the limitations of the study which are as follows:
1.5.1 Scope of the Analysis
The scope of the study has mainly focused on the commonvaluation methods
and its process correlation with Islamic principles. The reason for studying the
methods will be further explained in chapter 2. Hence, the data and the sample
selection for qualitative analysis have been specifically tailored towards achieving
the research objectives under two valuation methods selected; Comparison
Method and DCF Method (Investment Method), thus along this study, the „valuation
methods‟ term will be refer as Comparison and DCF Method. Consequently, the
study has not directly looked into the practicality within the industry that would
require participation from the real practitioner since the theoretical basis had to be
determine in the first place. The study also tailored limited to the property valuation
segment only. Nevertheless, the study has taken into consideration the possible
contributions from academician and panels having exact knowledge or interest in
the subject field and ultimately in the structure of Maqasid Shari‟ah itself.
12. 1.5.2 Definition of Elements Study
18.104.22.168 The Risk-free Rate
The risk-free rate in valuation method is riba‟ as viewed by Islamic
Scholars, hence it leads to one thought, the researcher herself, whether
the valuation process and outcome is permissible according to Islam.
There is no single rate that actually „risk-free‟ but the rate called as riskfree due to its no default risk and reinvestment risk. In DCF Method,
government bonds are widely used as the „risk-free‟ benchmark. The
government bond rate is also used to benchmark property returns and
may be regarded as the starting point for the „all risks‟ property yield
(whether it is an initial, equivalent or reversionary yield.
22.214.171.124 Uncertainty or Gharar
Uncertainty is a measure of our inability to assign a single value to
a possible event and defined as the variability of possible outcomes (e.g.,
rate of return, risk premium) around their mean (expected) value. The
quantification of uncertainty is the difference between the true value of a
natural outcome and an estimate of its value. Bias occurs when values
are systematically over- or underestimated. Uncertainty is Islam being
defined as Gharar which also known as uncertainty, doubtfulness and
ignorance on certain details in a contract or transaction. The uncertainties
covered under this study were gathered from various literatures and study
that discussed within Comparison and DCF Methods, which their
13. statement become basis on evaluating their permissibility with Islamic
1.5.3 Data Available on Valuation in term of Islamic perspective
The findings derived based on Islamic principles towards valuation practice
but it may be constrained by the limited data available for this study. For instance,
the free-interest model few suggested used to represent for asset pricing and the
existence of interest as a benchmark findings basically origin from the valuation of
the capital asset. Hence, the findings were mostly based on indirect property
investment valuation not on physical property itself. But the suitability of main
points taken from these findings will be re-addressed in the primary data collection
Though the sample of respondents which comprises panels or expertonly, it
is deemed sufficient since it merely cover the exploratory aspect of possible
Shari‟ah-compliant valuation methods. The respondents participating are Muslims
professional who may already have knowledge and interest about Shari‟ahand real
estate valuation. But, the number of academician with such interest is admittedly
very small in Malaysia. Furthermore, the study has purposely selected only Muslim
with relevant seniority as respondents to suit the scope of the study.
14. CHAPTER 2
Real estate, because of its bulk, high unit value, and individuality, is not bought
and sold like other commodities. Ordinarily, it requires considerable time to effect a real
estate transaction, and it cannot be assumed that the market knowledge of buyers and
sellers is complete or equal. As a result of the imperfections in the various markets for
real estate, wide variations are observed in the market prices of identical properties over
short periods and caused the raised of possible uncertainties or in Shari‟ah interpretation
Gharar in generating value of property subjected. The application of traditional methods
of valuation is exclusively and generally accepted by Malaysian Valuers with no
evidence of questioning their suitability or accuracy (Md. Yusof A, 1992). The Valuer is
continuing to apply the standards developed in 1930's, or before which have been made
obsolete by new advances in theory and technology(A.Rahman & Sipan, 1996). Current
traditional methods of valuation which are commonly practiced throughout the real estate
(Shapiro, Mackmin, & Sams, 2013)worldseemed to be associated with uncertainties and
2.0 Property Valuation
Valuation is the process of determining market value; an estimation of the price
of exchange in the market place. Valuation, in its simplest form is the determination of
amount for which the property will transact on a particular date (French, The Valuation of
Specialised Property, 2004). While Baum, Crosby and MacGregor (1995) defined
15. valuation is the estimate of the most likely selling price, the assessmentof which is the
most common objective of the Valuer. The most likelyselling price is usually termed
“open market value” in the UK. It shouldnot be confused with worth. The essence is that
a valuation is an estimation of the most likely selling price on the open market, on the
basis of both a willing seller and a willing buyer (Sayce, Smith, Cooper, & Rowland,
2006).Valuation is not an objective exercise, and any preconceptions and biases that a
Valuer brings to the process will find their way into the value.
An estimate of value is an analysis of market trends (Boykin & James, 1983).
Consequently, any Valuer must have an introductory knowledge of supply and demand
analysis to understand how the market functions and what interrelationships among the
market forces are involved. Various literatures and reading sources emphasize that
there were strong bond between the property valuation and market forces. Relying upon
economic theory, Valuer generally accepted market prices as a central value concept in
certain valuation purposes however after the collapse of real estate market as early as
1930s, Valuers have become increasingly reluctant to accept market prices as the
appropriate measure of market value (Wendt, 1974).
2.1 Comparison Method and Investment Method as the Focus of the Study
The effect of market forces towards the production of property value had caused
the rise of uncertainty in the market itself contribute in the essence of valuation process.
Under this study, the valuation methods that will be specifically identify its uncertainty
and existence of potentially Riba‟ are Comparison Method and Investment Method. In
16. McParland, Adair and McGreal (2002) survey conducted among four European countries
concluded that Valuers in these countries favor Comparison method and Investment
Method specifically Capitalisation method and Discounted Cashflow (DCF). While Fraser
(1985) stated that Comparison method valuation which is the one most closely based on
market evidence, is the most rational system in property valuation, while the years'
purchase (YP) method seems likely to be superior in the large majority of cases. Other
than that, the fact that both methods lay the uncertainties and risk-free rate (Riba‟) within
the structure of the methods, became the reasons for the scope under this study.
The UK valuation profession has been criticised for inconsistencies and failures
to reflect risk and uncertainty in certain valuation assignments such as the pricing of
urban regeneration land (Lorenz, Truckz and Lutzkendorf, 2006). Also the Investment
Property Forum/Investment Property Databank specifically concluded that a new
approach is needed which combines conventional analysis of returns uncertainty with a
more comprehensive survey of business risks. This debate has been brought into
sharper focus by the publication of the Carsberg Report (2002), which emphasized the
need for more acceptable methods of expressing uncertainty, particularly when pricing in
2.2 Nature and Characteristics of Uncertainty and Risk-Free Rate in Valuation
2.2.1 Characteristics of Uncertainty in Valuation Methods
As being mentioned in earlier part of study, uncertainty was tremendously
discussed by previous researcher and continues to be debate at recent time, and
it is one of main concern and issues to be deal in valuation practice. Waleed
17. (2000), stated that uncertainty or according to Islam being called as Gharar, in
asset valuation are one of indicator in ascertain the valuation deem to be
shariah-compliant valuation. But, it is an indirect property investment valuation
not on the physical property itself. Still, there was relationship between the
uncertainty elements in valuation methods with the uncertainty mentioned in
others asset or instrument valuation, such as verify by Rahimie (2010) which they
are, the adjustment process, rate of return, premium rate and future expectation.
And he stated that these uncertainties consider as Gharar in Islamic definition.
Valuation uncertainty should be distinguished from uncertainty risk.
According to International Valuation Standard Council (2012), valuation
uncertainty is the possibility that the estimated value may differ from the price
that could be obtained in a transfer of the same asset or liability taking place at
the same time under the same terms and within the same market environment.
RICS (2008) one of Valuer‟s representative institution, believes that valuation
uncertainty as defined in Guidance Note released by them, has existed in the
market for some time in many world regions, and has become more marked.
A valuation is not a fact; it is an estimate of the most probable of a range
of possible outcomes based on the assumptions made in the valuation process.
Uncertainty in valuation methods could arise from the market uncertainty, the
method uncertainty and the input of values that required within the method
structured. Model and input uncertainty arise from the valuation process, are
closely related and may be measureable. Market uncertainty arises because of
events external from the valuation process and is not normally measureable.
18. Market uncertainty arises when a market is disrupted at the valuation date
by current or very recent events such as sudden economic or political crises. The
disruption can manifest itself in a number of ways for example either through
panic buying or selling or by a loss of liquidity dueto a disinclination by market
participants to trade. An outbreak of sudden trading activity in response to a
crisis may cause rapid price changes that are not necessarily representative of
those that would be agreed between parties acting “knowledgeably and
Model uncertainty arises from characteristics of either the valuation
model, or method, used.For certain property types, more than one method may
be customarily used to estimate value.However, those models may not always
produce the same outcome and therefore the selection of the most appropriate
method may of itself be a source of uncertainty. Input uncertainty arises where
there are a number of equally reasonable or feasible inputs or assumptions that
can be used from the degree of veracity that can be attached to the data inputs
used in the valuation and their impact on the outcome. This study will looks on
the input uncertainty in valuation methods as being studied and reported by
various researcher and bodies.
Uncertainty in valuation method denotes both the perception and feeling
of uncertainty with regard to events in the immediate or in a more distant future. It
refers to a lack of knowledge and to the decrease or lack of predictability
regarding future events. According to RICS (2008), it is recognised that the
valuation process is extremely difficult when there is a greatly reduced volume of
reliable sales evidence. Despite these difficulties it is not appropriate for reports
19. to feature caveats or qualifications which would cause the client or auditor to
question the validity of the valuation, or to qualify a valuation report. In each local
market and for each property asset type the Valuer must decide whether an
element of market instability - an example of valuation uncertainty – exists. There
are few elements of uncertainty in valuation methods that further explained under
both methods headings.
2.2.2 Risk-Free Rate Nature in Valuation Methods
. The risk-free rate natures need to be re-address its application in
valuation methods in this study. Purchaser who buys propertyhas a return that
they expect to makeover the time horizon that they will hold the property. The
actual returns that they make over this holding period may by very different from
the expected returns, and this is where the risk comes in. Risk in holding is
viewed in terms of the variance in actual returns around the expected return. For
a transaction to be risk free in this environment, then, the actual returns should
always be equal to the expected return.
There are basic conditions that have to be met in considering the rate is
risk-free. One of it is that there can be no default risk. The only securities that
have a chance of being risk free are government securities, not because
governments are better run than corporations, but because they control the
printing of currency. There is a second condition that riskless securities need to
fulfill that is often forgotten. For an investment to have an actual return equal to
its expected return there can be no reinvestment risk. (Damodaran, 1998).
20. In financial markets, government bonds are widely used as the„risk-free‟
benchmark for the purpose of comparing the returns of different financial
products. These bonds are a form of debt, issued by government, which are
guaranteed to be repaid at a fixed date and with a fixed rate of interest. The
government bond rate is also used to benchmark property returns and may be
regarded as the starting point for the „all risks‟ property yield (whether it is an
initial, equivalent or reversionary yield. The risk-free rate is generally measured
as short-term Treasury bill rate, which is highly responsive to inflation.
Capitalization rate depends on general level of inflation and interest rates. The
risk-free rate applied is considered as riba‟ in Islamic views and its further
elaborate under Investment method heading and context.
2.3 Concept and Theories of Valuation Methods: Comparison Method &
Investment Method (DCF Method)
2.3.1 Comparison Method
This method used for most types of property where there is good
evidence of previous sales. Comparison method is applicable when there is
similarity of characteristics between the comparable and subject properties. The
most popular valuation method among Valuers is the Comparison Method (
Anuar, 2002; Fischer, 2002).The economic law of substitution would lead us to
believe that in competitive markets equal market prices would be established for
real estate as well as for other commodities which furnish equivalent amenities or
prospects for income (Wendt, 1974). As a result of the working of this principle,
the comparison method is by all odds the most widely used method in
21. establishing values in the economy as a whole. It has already been observed that
the comparison method is adaptable only when the value sought is market value.
Market value as defined under in the Malaysian Valuation Standards
issued by the Malaysian Board of Valuers, Appraisers and Estate Agents (1969)
as “the estimated amount for which a property should exchange… between a
willing buyer and a willing seller in an arm‟s length transaction…”. Market Value
may or may not be equal to market price. Epley and Boykin (1983) stated that, if
the transaction in the market that resulted in a market price has satisfied all of the
assumptions that are included within the definition of market value, the market
price that is observed is most likely very close to the market value of the
property. Consequently, the comparison approach to estimating market value
revolves around locating a sufficient number of recently sold comparable or
similar properties to the subject property being appraised.
Since this approach relies upon prices set by the market between a
willing buyer and a willing seller, this estimate of market value is given
considerable weight. If the comparable properties are very similar, the other
estimates of market value – reproduction cost- new and income/investment-could
conceivably be used as only a check on the “reasonableness” of the market
value estimate derived by this approach. In the addition, the comparison
approach may be given total weight if a sufficient number of comparables exist to
justify the estimate of market value.
22. 126.96.36.199 Uncertainty Elements in Comparison Method
Two important steps in applying the comparison approach are the
selection of the comparable properties and the adjustments that are
performed to the comparables. In both steps, the elements of
comparisons are used, which consist of few criteria that serve as a basis
for categorizing the similar characteristics among properties.
The reasons for these rules are not as simple as they may appear
on the surface. Two properties located in different neighborhoods may
bring different prices for no reason other than the location. Anytime the
Valuer selects a comparable from another neighborhood, community, city
or region, he or she must be able to prove that the two locations and their
influence on the value of the property are the same. This task becomes
more difficult the further removed the comparables is from the location of
the subject being valued.
Generally the less information, in the form of comparable sales,
the more the Valuer will incline to use a model that reflects the role of
property as the asset to the business (Sayce, Smith, Cooper, & Rowland,
2006). But, the adjustment element that provides rooms for rationalized
the differences between comparables and subject property caused the
method persistently being opted by Valuers. Comparison method which is
generally considered as the best and most reliable method is full of
subjective elements in the adjustment process(Richmond, 1972).
23. The adjustment process covers the steps where the selling price
of the comparable property is transformed into an estimate of market
value for the subject. Several important concepts must be discussed early
to assure that the nature of the adjustment process is understood.
a. Place the features of the subject property into the comparable
b. Adjustments are made for the differences
c. The amount of the adjustment should be market derived
d. The method of adjustment can be currency amount, percent amount,
or whole amount
e. For convenience, the adjustments are done by element of comparison
and/or distinct property features under an element of comparison.
The Figure 2.1 below showed derivation of value from the
comparables available, adjusted by using percentage amount. As being
specified by Anuar & Asyikin (2008), if a comparable property is superior
to the subject property to which it is being compared, then a negative or
minus adjustment is made to take the comparable property from that
superior position down to an equal level equal to the subject property. If a
comparable property is inferior which it is being compared to the subject
property, then a positive adjustment is made. The market itself
determines whether the item is superior or inferior. In instance, the size of
comparable 1 is smaller than the subject property hence, it has higher
margin per square foot after divided with the consideration. In term of
date, it was assume that every year, there were an increase 5% hence
24. then concludes the total 15% were adjusted as on the date of valuation
on year of 2013.
From the Figure 2.1, the green highlights indicate
uncertainties in Comparison Method. While the amount of adjustment
were based on the work done by previous study and also based on the
experience of the Valuer dealing with the different characteristics of the
property. Hodges (2007) states that no specific mathematical theory
exists regarding the property averaging of percentages. Eventually, these
figures of adjustment are backed with fuzzy reasoning (Scott, Gronow, &
Rosser, 1988). The fuzzy reasoning can be said suitable for the treatment
of linguistic concepts such as „good surrounding‟, „excellent location‟ etc
(as shown in Figure 2.2). The usage of linguistics phrases has
constructed using such ad hoc sets of phrases. This fuzzy quantifiers
being preferred because of its straightforward to applied in making
adjustment justification. This type of uncertainty could produce a suitable
representation of the professional judgment a Valuer may be called upon
to exercise, particularly inproducing a final valuation figure, or in
'rounding' values to suitable figures. (Scott, Gronow, & Rosser,
1988).Finally Schefe (1980), a particularly strong critic, claims that this
linguistic vaguenessis an uncertainty about the predicate's applicability
rather than its definition.
On the consideration itself, A. Rahman & Sipan (1996) stated that
the principles uncertain factors during disposal phase include the sale
price or the consideration of the said property. The consideration became
one of the uncertainties, because of the nature situation that arise during
disposal. As example, the consideration could be higher than the
25. prevailing market value, when there is high demand for the subject
property caused the property being set at such price. In other instance,
after taking aside the example of below figure, in other cases James
Wong (2013) mentioned the banks or developers decides on price of new
property launches without the consultation from the Valuer but somehow
one day the price will be consider as the comparables by the Valuer in
conducting their valuation service which this situation Valuer themselves
cannot comprehend the strange element in looking the best comparables
to be use.
Few Malaysian bankers have requested Valuers to value
properties for loan purposes above their „Market Values‟ as defined in the
Malaysian Valuation Standards to keep customers happy (Ernest
Cheong, 2013).This provided situation create uncertainty since the
Valuers does not give their true and correct professional opinion. Quan
and Quigley (1991), Geltner (1993) and others have theorized that
Valuers rely on previous value estimates in the face of greater
Even when Islamic principle does not take into account, the ethics
itself is wrong and having knowledge on the „implied‟ purpose of past
valuation is not possible in some way. If this kind value or price choose as
the comparables would not give justice to certain interested parties. Even
so, this kind of uncertainty is something for Valuer cannot avoid since the
„implied‟ purpose is not reachable towards Valuers knowledge unless it is
done by them or being told so hence the value or price can be avoided.
26. COMPARISON OF LAND VALUE
KELAB GOLF NEGARA SUBANG,
Kelab Golf Sultan Abdul Aziz
SS 7/2 KELANA JAYA, 47301
PETALING JAYA, SELANGOR
Bukit Raja/ Petaling
Lot 741 & 742
EXISTING LAND USE
Kelab Golf Diraja Selangor
Kelab Golf Negara Subang
Leasehold (99 years)
Land Cost per sq ft
The best comp used is comp 3 since it’s the subject property itself
Land Value of our subject property
Figure 2.1: The Derivation of Land Value & the Uncertainty Elements in
(Source: Ground work done by Researcher, 2013)
Note: Peter Wyatt (2013) Property Valuation
Figure 2.2: The input of fuzzy reasoning in estimating market rent
under valuation process.
Anuar & Asyikin (2008), reported the problems encountered in
applying comparison method in Malaysia are as follows;
There is current lack of data to guide Valuers on the preferred technique
of adjustment to use, this made Valuers uncertain about which
technique is more appropriate to apply
The Valuers are uncertain on which adjustment techniques are most
appropriate to use
There is lack of empirical study to examine how Valuers perform the
technique and what are their preferred.
Certain professional Valuer support the fact that there is deplorable
deficiency of precise and timely data of past transactions to apply
28. Comparison method for suitable cases. Even in Europe the availability of
information is sparse (Adair et al., 1996).Without a particular grasp on
spur of the players in the market, when comparable is lacking, Valuers
grueling in coming up with correct or reasonable valuation. Peto (1997)
had specified three reasons why this is usually the case:
(1) There may be insufficient transactions to guide a Valuer.
(2) There may be a sufficient number of transactions but the information
isnot made available.
(3) The attributes of the properties involved in market transactions
whichform the “comparable” evidence are sufficiently different from
theproperty to be valued/priced as to create serious difficulties
intranslating the evidence with any degree of confidence.
2.3.2 Investment Method: Discounted Cash Flow Method (DCF Method)
The Investment method is applied to value income-generated vacant
possession property having possibilities to generate a rental income or in
situation when it is owner-occupied commercial property rent out to generate a
rental income. In UK, this method considered as primary method in assessing
commercial property. This method considers in todays‟ terms the net income
streams that a property will produce currently and in the future. Using the present
value of RM1 methodology, each of these annual income streams is discounted
to arrive at today‟s value.
29. There are five crucial components in this method; i). the passing rent, ii).
The estimated market rental value as at the valuation date (this is decided from
comparable evidence of latest transaction), iii) the yield (s) are determined from
comparable evidence of latest transactions and derivation of year purchase
multiplier and applied to the net rents, iv).the buyer‟s cost of proceeding with the
transaction. The valuation yields determined on the reasoning that the return on
the purchaser incorporate the cost of the transaction, vi). the span of the time
period and the related costs from vacant holding to income-generating.
In Investment method, there are traditional Capitalization method and
Discounted Cashflow method (DCF) which the latter consider as the modern
method in valuation. The circumstances under which the YP system may lead to
inaccuracies are those relatively rare occasions in which evidence is insufficient
to enable the Valuer to accurately identify the appropriate capitalisation yield,
particularly long reversions, short leaseholds and other investments with a nonstandard pattern of income flow. In these circumstances a discounted cash flow
(DCF) approach does seem appropriate, but this should be based as closely as
possible on market evidence (Fraser, 1985).
The capitalization method is relatively straightforward method involving a
process of analyzing market information followed by application of the identified
yield or capitalization rate (McParland, Adair and McGreal, 2002). Some
researcher or expert refers this method as traditional implicit valuation while DCF
refer as the explicit DCF method. The traditional method have different
methodology in calculating for freehold and leasehold property, with leasehold
property valued can be valued under single rate, dual rate or dual rate with tax
30. adjustment. Figure 2.3; show freehold term and reversion valuation under single
rate. While Figure 2.4 provide a sample of leasehold term and reversion
valuation with dual rate.
FREEHOLD TERM AND REVERSION VALUATION - SINGLE RATE
Full Rental Value
YP in perp @
PV RM1 FOR
Figure 2.3: Freehold term & Reversion Valuation
(Source: Ground work done by researcher, 2013)
31. LEASEHOLD TERM AND REVERSION VALUATION - DUAL RATE
(-) RENT PAID
FULL RENTAL VALUE
(-) RENT PAID
PV RM1 FOR
Figure 2.4: Leasehold Term & Reversion Valuation (Dual Rate)
(Source: Ground work done by researcher, 2013)
Andrew Baum (1996) mentioned the traditional implicit valuation
continues to cause concern to many investment advisers and those in other
investment markets, and property market inefficiency cannot be seen
independently of valuation practice. While Peto (1997) specifically elaborates as
the proposition is simply that at particular times or in particular markets,
traditional techniques may result in systematic mispricing or, alternatively,
sporadic specific mispricing may occur (see Greenwell et al., 1976). Further
discussion on the different accounts in undertaking a valuation without explicitly
addressing the input variables were explained by Nick French and Laura Gabrielli
working paper on Discounted Cash Flow: Accounting for Uncertainty. But, under
32. this study, we will focus on DCF methodology structure because of the number
uncertainty in this type of method is more compare to the traditional one because
of the explicit nature of its computation (refer to Mallison Report, 1994; Carsberg
Report, 2002). This method, which measures income returns by subtracting
expenses from gross rental income. Cash flow growth expectations are crucial to
the rationality or efficiency of the property market (Hendershott and MacGregor,
Valuers are, nevertheless, reluctant to use DCF method, as they are not
thought to reflect market behavior. Valuers are even more reluctant to use DCF
analysis linked to future forecasts of rental income, as evidence from the last 10
years showed how volatile the rental market can be over the critical first 10 years
of the holding period. For these reasons, as stated by Mackmin (1997), the DCF
method is primarily used as “a tool of analysis, rather than a method of
valuation”. However, a DCF calculation is preferred by Valuers when comparing
the value of subject property proposition with other method used. Therefore, this
study will be look on the uncertainty rise in the DCF calculation.
188.8.131.52 Risk-Free Rate and Uncertainties in DCF Method
The discount rate must be adopted which is at or around the
majority of individual target rates, example a market-derived discount
rate. The discount rate is commonly arrived at by adopting a risk-free rate
and making allowances for the risk associated with property in general
and the subject property, by adding a property risk premium. Valuers
relate their choice of risk-free rate to rates of return on traditionally safe
investments, such as government bonds (Hungria-Garcia, 2004).The
33. reasons for such reference, because the rate had to be „almost‟ risk-free
from default risk or price risk thus short-term or long-term government
security rate can be reliable source to refer in valuation input.
In the capital market, real estate, bonds and share are the primary
asset types available. Share and real estate usually negatively correlated
for the purpose of risk diversification. Unlike, real estate and bonds goes
along really well in their volatility attribute. One main difference between
the asset mentioned is that real estate is heterogeneous and unique and
its data on transactions is not calculated same as other assets which is
done on daily basis. On the other hand, bonds and share were easy to
assess their performance at high accuracy levels due to their similar
characteristics. Hence, the returns from this investment can be applied in
DCF‟s return inputs.
In relating to the study, Riba‟‟ predominately originates from debt
instruments like bank loans, as well as private and public interest-bearing
bonds (Rosly, 2005). Thus, the origins of Riba‟‟ usage in property
valuation method applied in this part.The rate is also considered as one of
the uncertainty in property valuation method (Adair & Hutchison, 2005;
French & Gabreilli, 2005).To add with the risk-free rate, it must be added
a yield to reflect the general risks of investing inproperty, such as
illiquidity, rent risk, capital risk, depreciation and then further addition of
the risk specific to the property such as lease terms, condition, location.
This yield refers to the risk premium which is a premium that landowners
demand an average risk in securing the property, relative to the risk-free
34. rate. So the discount rate could be taken to be the risk-free yield, say 4.5
percent, adding risk premium 2.5 percent, producing a discount rate of 7
percent. A risk premium of the order of 2 percent is usually suggested for
property (Adair & Hutchison, 2005). In the absence of a robust pricing
model and data limitations it is likely that discount rates for property will
continue to be estimated subjectively.
The DCF computation makes details assumption as to how
various elements of the calculation will change in the future, given that
inflation is the norm, the changes will be the rate at which these elements
will grow in the future (Shapiro, Mackmin, & Sams, 2013). Alternatively,
the Valuer may rely on personal judgement as to growth rates. In the
case of market rents, where the Valuer knows the ARY appropriate to a
property and also the discount rate, an implied rate of rental growth can
be determined and used to estimate the predicted rent at each rent
review (Sayce, Smith, Cooper, & Rowland, 2006) (as shown in Figure
2.5). From the Figure of 2.5, the risk-free rate was input in all risk yield (k)
and equated yield (e) computation, which act as basis in coming up with
the rate. Meanwhile (g) refer to growth of rental, which calculated by
using function or equation as shown in the figure. These elements, based
on the past study, presumed as uncertain in input a single figure.
In DCF method, estimation on exit value was done at the end of
calculation period and this method also makes forecast of the flows for
the same period. Normally, the period can differ from five years to ten
years, depends such as, the period of lease contract. To this according to
35. Adair and Hutchison (2003), the principal source of uncertainty is time as
the forecasting of future events is difficult and becomes more unreliable
as time elapses. On this premise, due to the lack of knowledge and
information, uncertainty arises. Noted that, the compelling part is that the
DCF estimates property market value in similar way as other assets
investment analysis, based on the expected future cash flows. Looking in
first sight, DCF ideally point is that it give the sense that accurate results
will be generated. But, the issue arises from this model is that the
capacity of expectation play its role. As no one can predict the future,
future expectations always lead to uncertainty. The value hence can be
totally over or underestimated, provide an incomplete idea of the liquidity
of the assets over the years.
In DCF method of valuation, rental growth and required return/risk
premium inputs should clearly be market estimates derived from
comparable evidence, preferably of sales of simple freeholds let at the
estimated rental value (Baum, Crosby, & MacGregor, 1996). The level of
implied rental growth can be ascertained given an assumption about the
required return (the risk free rate plus a risk premium) and the differences
which result from different choices of required return are usually
insignificant (see Baum and Crosby, 1995; Crosby, 1986).
36. Figure 2.5: The calculation of Rental Growth by using Mathematical Function
(Source: Ground work done by researcher, 2013)
Alternatively, the sale at RM 200,000 could be analysed using a simple
DCF format beginning with a required return based on the risk-free rate and a
risk premium. Suppose the required return ranges from 8 per cent to 15 per cent.
Whichever is chosen, the implied rate of rental growth can be calculated (inthis
case it will range from roughly 3 per cent to roughly 10 per cent),depending on
the chosen required return (Peto, 1997). The same required return and rental
growth rate can then be applied to the reversionary property. This method
ensures that the appropriate yield definition is applied to different parts of the
income flow. Figure 2.6 below calculate the market value by sum up all the
Present Value of Income with the growth (g) has been calculated as seen in
Figure 2.5. This valuation were done on office building having high occupancy
37. and located in a prime location where growth accounted at 3.7 percent. From this
figure, the involvement of uncertainty elements shown from the years applied,
growth rate and equated yield (risk-free rate as basis with addition of risk
premium) in deriving the market value of subject property.
1 - 10
11 - 15
16 - 20
21 - 25
26 - 30
31 - 35
36 - 40
46 - 50
Amt of RM1 Inflated
YP @ e PV of RM1 Present
10% @ e
Value of Income
Figure 2.6: DCF Valuation on Office Building
(Ground work done by researcher, 2013)
In a “modern” valuation, an adjustment to the risk premium is both
obvious and more transparent. As suggested earlier, the key variables (growth
and risk) are considered together and not distinguished in a traditional valuation.
In making adjustments to the yield, it is surely better to consider the components
of that yield separately and explicitly rather than together and implicitly (Peto,
1997). Thus, the separation of elements in the modern method, rise more
uncertainty which also required more prudent needs to justified and input all the
figures to be accurate and acceptable towards the parties involved.
38. 2.4 Gharar
Literally, the word Gharar implies risk, danger, peril, jeopardy, uncertainty and
hazard. Gharar, the English translation had applied the term interchangeably;
uncertainty. In jurisprudential terms, Gharar definitions can be summarized under three
headings ( Al-Darir, 1977; Al-Saati, 2003).
Gharar means doubtfulness or uncertainty as in the case of not knowing whether
something will take place or not, this includes the unknown. Ibn Abidin defines
Gharar as „uncertainty over the existence of the subject matter of sale‟ (shared
by Hanafi and Shafi‟i schools).
Gharar also means ignorance and this can be when the subject matter of sale is
unknown. Occurs when the purchaser does not know what he has bought and
the seller does not know what he has sold. According to Al-Sarakhsi Gharar
obtains where consequences are concealed. This view is shared by most jurists
Then, the probability of undesired outcome is envisaged into three classes.
Gharar occurs when consequences are totally concealed, which means the
probability takes the value between zero to one. This can be understood from the
definition of Gharar by Ibn Taymiyyah that “Gharar is the unknown
Gharar occurs when the probability of existence is equal to the probability of nonexistence. In Al-Bahr Al-Zakhkhar it is noted that “Gharar is the oscillation
between the occurrence and non-occurrence neither of which can outweigh the
Gharar occurs when the non-existence of the subject matter outweigh its
existence. Occurs when there is a possibility of two things occurring, the most
likely is the one you fear to occur.
2.4.1 The Prohibition of Gharar
Though there is no verse in the Qur‟an to proscribe Gharar explicitly,
vanity (al-batil) is forbidden in many verses:
“And do not eat up your property among yourselves for vanities, nor use it as bait
for the judges” (2:188). “O you who believe! Eat not up your property among
yourselves in vanities; but let these be amongst you traffic and trade by mutual
good will” (4:161).
There is a consensus among interpreters of verses that Gharar is vanity.
Ibn Al-Arabi explains that vanity is unlawful because it is prohibited by Shari‟ah
such as Riba‟‟ and Gharar. While Al-Tabari, considers vanity as eating up other‟s
property in a manner which was not permitted by Shari‟ah. The Sunnah forbids
Gharar sale, and there are many transactions which can be considered vanities
yet not mentioned explicitly in the Qur‟an and Hadith but left to good Muslim‟s
judgement to consider it.
In real life Gharar like uncertainty cannot be avoided totally. Al-Shatibi
says “to remove all Ghararfrom contracts is difficult to achieve, besides, it
narrows the scope of transactions. Jurists agree that the Gharar which affects the
contract is the excessive Gharar, as it impairs the validity of the contract while a
slight Gharar has no impact at all. With the absence of concept to measure
40. Gharar, wide differences exist among jurists in classifying Gharar and its
applications (refer to Al-Saati, 2003).
Some jurists try to lay down a rule for excessive and for slight Gharar.
According to Al-Baji, the slight Gharar is that (from which hardly a contract is free
while excessive Gharar is that which dominates the contract that it comes to
characterize it). Thus, valuation seems fall under this category since the methods
itself exist with the uncertainty and cannot be avoided. But the characterization of
contract as “Gharar Contract” is subjective and inevitably influenced by
differences in technology, time, societies, and individual taste and preferences.
This includes the possibilities in computing uncertainty by using all the computer
application and software such as Regression Analysis and the ignorance of the
Valuer themselves in stating the uncertainties in the valuation report for
In terms of degree of permissibility of Gharar is Islamic transactions,
Gharar can be classified into four types:
184.108.40.206 The Prohibited Gharar
This is the gambling type of Gharar which includes the idea of
voluntary and deliberate Gharar taking, also involving sterile transfer of
money or good between individuals, with no value added or created from
the transaction. Ibn Taymiyah and Ibn Al-Qayyim consider exorbitant
Gharara type of gambling. According to them “Gharar obtains where
consequences are concealed, selling with excessive Gharar is Maysir
which is gambling.
41. 220.127.116.11 The Permissible Gharar
According to Shatibi, the Hadith (which prohibits Gharar) does not
intend to prohibit all Gharar because jurists permit some transactions
which have Gharar such as selling what is hidden in the ground, selling a
house though its foundation has not been seen. The Hadith intends to
prohibit Gharar which can cause dispute and cannot be tolerated. The
Hadith intends to prohibit Gharar which can cause dispute and cannot be
tolerated. According to him this is the essence of the rule (manat al-hukm)
Istihsan, which is, according to Ibn-al Arabi “to abandon exceptionally
what is required by the law, because applying the existing law would lead
to departure from some of its own objectives”. Istihsan is used by jurists
to permit some Gharar transactions, and they stipulate conditions to
reduce the cause of dispute to acceptable level (Askari, Iqbal, & Mirakhor,
According to al-Shatibi, (n.d.), Imam Malik and Abu Hanifa
consider istihsan as particularization of general on the basis of stronger
evidence which is either obvious or implied. This was inclined by Imam
Malik on the basis of maslahah, which means giving preference to a
particular maslahah over the general ruling of qiyas. This departure can
be from an obvious qiyas to a hidden qiyas, and must rely on specific
evidence, which may be ruling of the text, general consensus, nessessity,
public interest or custom, it must be persuasive enough to convince the
mujtahid that there is a case of istihsan.
42. According to Al-Saati (2003), Gharar can be permissible when
there is no general agreement among the schools of jurisprudence that
this Gharar is prohibited and the contract that involves this Gharar is
invalid. If at least one school permits it with or without conditions, then it is
considered permissible Gharar. Thus, in term of property valuation since
there is no general agreement made, this type of uncertainty could
possibly applied to the property valuation‟s uncertainty.
18.104.22.168 The Acceptable Gharar
The Islamic scholars had adopt the conventional definition of risk
to be the measure of uncertainty about the frequency and the
consequences of an unpleasant or unacceptable event or (the probability
of undesired outcome expressed in money terms) and uncertainty arises
whenever a decision can lead to more than one possible consequences.
In the Islamic context jurists define Gharar to mean risk, and some of
them tend to prohibit all risks and Gharar but we found that only gambling
and gambling-like activities are prohibited. In this context risk and
uncertainty are considered synonyms to Gharar. Meanwhile, almost all
economics activities involve uncertainty or commercial risk or Gharar as
the profits out of them are uncertain.
As we know Allah and His messenger do not prohibit every risk
(Gharar). It can be said that when the endogenous or the exogenous
uncertainties are the main sources of Gharar then this Gharar can be
considered acceptable Gharar. The elements in property valuation
contain all the endogenous or the exogenous uncertainties as example
43. exogenous uncertainty are market values, rental values, property prices,
and the endogenous uncertainty, the professionalism of the Valuer
themselves, the rate reference or the knowledge or experience of the
Valuer in justifying their input.
22.214.171.124 The Mandatory Uncertainty
For this type of Gharar, as stated by Al-Saati (2008), is a
prerequisite to the validity of the contract. This is based on the Islamic
legal states “Damage and benefit go together”, that is to say, that a
person who obtains the benefit of a thing takes upon himself also the loss
from it and the Islamic legal maxim which is based on the Prophet (pbuh)
saying “Revenue goes with liability”.
It can be said that as according to the types of uncertainty/ Gharar
as above mentioned, the uncertainty in property valuation‟s method lies
within the description of permissible and acceptable Gharar, but to
validate the suitability, experts views will be assess to confirm the
2.5 The Discussion on the Uncertainties in Methods Studied
In simplified manner, the risk-free rate and uncertainty in both valuation methods
study were shown under Table 2.0, the Islam views and perspective were based on the
secondary data available and the characteristics are reason out on causes these
elements ascertain under both elements studied.
44. Table 2.0: The Characteristics of Risk-Free Rate & Uncertainty and Islamic Views
according to Elements of Permissibility in Comparison & DCF Methods
Input in DCF Method based on historical data
Rate taken from various sources; e.g government bond rate
Also consider as uncertainty
Uncertainty - Gharar
Rate & Risk Premium
Indicative value, unsuitable comparables, misguided
Subjective manner, fuzzy reasoning, lacking well-defined guidance
Depended on economic performance, subjective,
significance with outcome result
Future expectation is unpredictable, explicit nature
Islamic Views & Perspective
*Riba', it is non-permissible
*Islam does not limit return making
*The rate as benchmark, and it is
permissible for necessity
*If the amount of uncertainty is
insignificance towards economic
as a whole, it is acceptable and
permissible gharar according to Islam
*Must backed with analysis
(Source: Ground work done by Researcher, 2013)
In financial markets, on the objective of contrasting the return of varying financial
products, the government bonds are widely used as the „risk-free‟ benchmark. The
government bond rate is also used to benchmark property returns and may be regarded
as the starting point for the „all risks‟ property yield (whether it is an initial, equivalent or
reversionary yield)(Nick French, 2004). This yield is eventually as stated in earlier subtitle were one of key element in Investment Method.
The variables which have the greatest impact on the site value are reflected in
the "All Risk Yield" (A.Rahman & Sipan, 1996). A high risks will represents a higher
yield. Use of the „all risks‟ yield (and this term may include the initial yield, the equivalent
yield or the reversionary yield) is widely accepted for the purposes of analysing
transaction evidence, but it may serve to mask some of the fundamental assumptions
45. that investors are making about properties (Bywater, 2011). In decision making process,
the central tandem of its working is the relationship between possible of level of risks
and the assumptions on income and capital growth. The purchaser will demand higher
return, when there is higher probability of the transaction failing to deliver anticipated
cash flow returns.
An investor in land and buildings (landed property) will be aware of the other
forms of investment available and of the yields to be expected from them. Investors will,
therefore, judge the yield they require from a landed property they require property
investment by comparison with the yields from other forms of investment such as
insurance, building societies, stock and shares. Although the principles governing yields
discussed above are as applicable to landed property as to other forms of investments,
certain additional features have to be considered. In actual valuation, the yield must be
derived from the market evidence.
The prominent looks on the existing valuation model is the inclusion of interest in
most of the valuation model applicable such as Investment Method. Islam has strictly
prohibited interest which also called as Riba‟‟ (refer to Minsky, 1982; Kamal et. Al, 2010;
Febianto, 2010; Thajudeen, 2012). Various verses from Quran mentioned how Allah
S.W.T. totally forbid Riba‟‟ in our life. However, Shari‟ah does not prohibit the making of
a return on capital if the provider is willing to share in the risks of a productive enterprise
(Hosen, 2010). As mentioned earlier, the risk-free rate applied in valuation meant for
yield purpose. The conclusion then is that whenever capital is “lent” rather than
“invested”, interest (Riba) is the return rather than profit. This particular interest had to be
known or ascertain and the reasoning process in choosing the rates had to be reported
for adequate transparency, and concurrently subjected rates derived from the Islamic
46. rates since it involved shared risk. Moreover, as Islam prohibits financial gain without the
assumption of some measure of risk it would appear that efficient markets and the
random walk behavior of financial assets and commodities are implicitly, if not explicitly,
subsumed in Islamic teachings (Askari, Iqbal, & Mirakhor, 2009). As according to one of
the hadith of Rasulullah (pbuh), he does not want to limit the profit able to make in
trading, as long as the profit range is within the market range, it is allowable (Abd
Rahman, 2009).Since, the yield is based on the prevailing risk-free rate hence the yield
does fulfill the condition of within market range substanstial. Does the basis of yield in
property valuation method is permissible according to Islam? It will be confirm in Chapter
Valuation need to be emphasized on the validity and transparency of contracts.
Any contract failing to pin down its key components (e.g. price, subject matter, delivery
date etc) in a manner in which the uncertainty may cause a dispute between the
contracting parties is guilty of containing “Gharar” (Unacceptable Uncertainty) and is null
and void in the eyes of Shari‟ah. French and Gabrielli (2004) mentioned suggested
further research on more work will be required to agree on the pertaining issues of
uncertainty in valuation. Therefore, there is indeed a need for in-depth study on the
possibility of uncertainty in valuation. The principal problem as argued by the Mallinson
Report (2000) is that that all valuations are uncertain. Mallison also added a valuation
figure is an individual valuer‟s estimate of the exchange price in the market place; it is an
expert‟s opinion. Regardless of this, the end-user and client prone to belief that the
figure outcome from valuation is a fact. Strangely, for other areas of asset valuation, fully
acknowledge that valuation is an estimation. But, for real estate there are common views
that valuation figures are final and accurate. Uncertainty in valuation will change
according to market conditions and property type and this uncertainty characteristics
pertaining to them is not being fully known by most people involved in valuation.
47. Historically, the only reference to uncertainty in the RICS‟ Red Book (RICS, 1996) is a
specific reference to “abnormal uncertainty”.
The Valuer should refer in report when there is range of uncertainty which may
be greater than normal and lack of information to a particular condition, therefore the
client or end-user can decide the magnitude of uncertainty in recount to the estimated
value output. The strange side is that this referral was made towards „uncertainty greater
than normal‟. This supported by Mallison, French and Gabrielli (2006) which hold the
same idea that uncertainty should be reported for a better decision making and assist
the end-user apprehend or figure out the valuation concept. The reporting requirement
does inline with a character of the Valuer or depends on the Valuer professionalism. A
Valuer may or may be not a Muslim should be a person to whom people can trust and
these people include the end user of valuation. The Quran makes trust and
trustworthiness, as well as keeping faith with contracts and promises which includes
contract in appointment as a Valuer, obligatory and has rendered them inviolable,
excepts in the event of an explicitly permissible justification as mentioned by Iqbal and
Mirakhor (2007).Therefore, Valuer should being obliged to the needs to report such
uncertainties in their valuation report, after all being trustworthy is a sign of faith. French
and Gabrielli (2004) extend their suggested model on to incorporate the extra variable of
rent with their concern on input uncertainty variables in valuation model. However, as
noted by them, these inputs are not independent and thus it is necessary not only to
consider the range of uncertainty, but also the inter-relationship of the two variables, rent
and ARY. The variable, ARY which rate as discussed earlier is also part of Gharar in
valuation in this context.
48. Richard V.Ratcliff (1972) suggested the application of statistical analysis to deal
with uncertainty in value prediction, which results from imperfection and lack of market
knowledge. Byrne and Cadman (1984) defined uncertainty as anything that is not known
about the outcome of a venture at the time when the decision is made. It is generally
agreed that uncertainty is due to the lack of knowledge and poor or imperfect information
about all the inputs that can be used in the analysis (French & Gabreilli, 2004). In the
context of valuation this refers to the input variables; the comparable information. If we
are unable to confirm the veracity of the inputs then the resulting outcomes (valuation)
are partially uncertain. Conversely, where there is a lot of comparable transaction data
(either in the form of capital value and/or rents/yields) then the Valuer will value without
reference to the original thought process of the occupier(Wendt, 1974). Does this
reference is part of the uncertainty?
Some Valuers differentiate between risk and uncertainty along the lines that risk
can be quantified about the outcome but uncertainty, cannot (Byrne and Cadman, 1984).
The principle uncertain factors at the disposal phase are sale price, rent and investments
yield (A.Rahman & Sipan, 1996).
Probability theory is a way of measuring uncertainty (Byrne and Cadman, 1996).
It allows the user to identify a range of outcomes for the most important variables and to
assign probabilities to these variables. Simulation is a further development of probability
analysis and Monte Carlo simulation has been an important component of quantitative
risk since 1960s (see Hertz, 1964). In the form of discrete distribution (histogram) or
normal distribution the results of simulation being illustrated. Through this, its allow the
Valuers to have a clue about the range of the outcomes and the probability of the values
at each point of the distribution (Evans, 1992).
49. Byrne (1989), suggesting that all Valuers are aware that inputs and output from
appraisal and valuations are uncertain, used a technique for risk analysis (and a
package called @Risk) in a discounted cash flow (DCF) model to provide a better
decision-making model for property investments. This was echoed by Kelliher and
Mahoney (2000) who used a Monte Carlo Simulation to model outcomes in the context
of a long-term investment decision. This was further developed by Fraser (2004) who
also suggested the use of a DCF analysis to generate a number of outcomes via a
The precision of the simulation rely on the data‟s quality applied in the model.
Still, the problem remains of the capability to lay down the real range of the inputs and
their probability distribution, mainly towards the professionals‟ practitioner who are not
familiar with the statistical measures.
The importance of uncertainty for the valuation profession become under
spotlight under the examination done by Royal Institution of Chartered Surveyors (RICS)
on studying how uncertainty can be applied to together with the value. Also, therehas
been some debate in the literature about valuation variation and the margin oferror in
valuing properties (Adair et al., 1996; Crosby et al., 1998). But somehow, this errors and
variation is cause from the Valuers ways of valuing the subject property themselves and
not so much from the methods itself.
The uncertainty in valuation which also arised from the market could cause from
the fixed predetermined, interest rate mechanism as its core- is inherently fragile and
prone to periodic instability (Minsky, 1982). The institutions ordained by Islam reduced
uncertainty and ambiguity to ensure predictable behavior. Malaysia having dual system,
50. conventional and Islamic creates a challenge in achieving as prescribe institution.
Although the current property valuation prone to the market condition basically from the
conventional environment but it seems unavoidable as the demand and supply of
property is depends on the economic of a country hence both micro and macro
economics had to be together to avoid much bigger externalities towards Malaysia as a
whole. The important component in valuation itself is the date of valuation became
obvious of the fact that the valuation should reflect the market condition at that time.
51. CHAPTER 3
RESEARCH DESIGN / METHODOLOGY
Since there is limitation of knowledge or research available in this scope of study,
this research is an exploratory study. An exploratory study involves extensive preliminary
works in order to build a comprehensive understanding on what is going on followed by
rigorous analysis to explain and address the impending situation. On the other hand, a
case study is a research approach that involves an “in-depth, contextual analyses of
matters relating to similar situations in other organisations” (Sekaran, 2003: 125). This
strategy is especially useful if a researcher intends to obtain greater insights and
understanding of the context of a particular situation. Based on the nature of the subject
interest being investigated and the research process involved, this study can be
categorised as a case study analysis with a combined research purpose of exploratory.
This study attempts to examine the existence valuation process compatibility with
Shari‟ah Principles. To enhance the robustness of the analysis, this study employs case
oriented analysis on the primary data (open-ended discussion) and content analysis
from secondary data.
3.1 It is an exploratory Research
Given the fundamental nature, exploratory research often concludes that a
perceived problem does not actually exist. Hence, an in-depth study were done on the
secondary data available that discuss on the issues that believe exist potential in against
the Shari‟ah principles. It is an exploratory research since the research is based on the
researcher own curiosity and questions, hence due to limitation of data, it is deemed as
52. exploratory one. The study had to be done through a qualitative approach such as
informal discussions with the industry practitioner, academician and others individual
At first, the study happens to be too general, under the scope of Shari‟ah
compliant valuation; but after going through numerous articles on property valuations
issues, the subject pertaining non-Shari‟ah being more specific thus lead to formulation
of relevant hypothesis for more definite investigation, and they are the risk-free rate and
The results of exploratory research are not usually useful for decision-making by
themselves, but they can provide significant insight into one doubt and act as reminder
towards practitioner to be professional not just towards other parties involved within their
working surrounding but also which most importantly towards their Creator, Allah S.W.T.
This study was an exploratory research since the topic or issue is new and the data is
difficult to collect even in finding suitable interview/respondent is merely challenging to
The qualitative analyse the primary data obtained from open-ended discussion is
analysed using both the statement analysis and content analysis methods. The
statement analysis is used to analyse the interview transcripts whilst the content analysis
is used to analyse research, books, newsletters, magazines, newspapers and other
relevant publications. The content analysis will foreseen on two different field, the
property valuation industry and Shari‟ah development industry.
53. 3.2.1 The Qualitative Analysis Method
The qualitative analysis attempts to explore the permissibility of uncertainty
and risk-free rate in current practice of property valuation methods. More
importantly, some issues pertaining to scope of study actually can be explained by
merely analysing the secondary data but as the researcher does not come from
Shari‟ah or Islamic studies background hence conformity with the academician is
required to ensure the validity of the findings. Instead, such validity can only be
acquired by directly approach expert, this is what the qualitative analysis of this
study is designed for. By emerging the findings from qualitative analysis and
literature reviews, a comprehensive study pertaining to the permissibility of
uncertainty and risk-free rate in property valuation practice and conclusion on
issues surround the permissibility of valuation according to Shari‟ah can be
126.96.36.199 Research Tool in Qualitative Analysis Method
This analysis uses open-ended discussion, face-to-face interview
and through online interactive discussion with academician with Islamic
background from various higher institution learning and in industry within
Malaysia as its research tool. By definition, an interview is “a purposeful
discussion between two or more people” (Kahn and Cannell, 1957) that
“involves questioning or discussing issues with people” (Blaxter et al., 2001).
The face-to-face interview method and internet interactive discussion is
54. selected in favour of other research tools such as telephone interview,
survey questionnaire, personal observation or due to the following reasons:
Face-to-face interviews provide direct access with the main subject
of this research namely the academician themselves;
Since the issue being investigated in this study i.e. Shari‟ah
principles adherence involves a broad and practical area, a more
flexible format of questions or style of questioning is needed in order
that the issue can be discussed more thoroughly with the
respondents. This includes the ability to modify, alter or vary the
interview questions immediately (during the interview session) or to
quotes impromptu questions in order to adapt to the academician
responses. A survey using questionnaires, for example, is lacking
this important flexibility;
The interview will allow the researcher to detect nonverbal cues by
observing the body language of the respondents when they answer
a particular question. The body language is crucial since it may
contain implicit messages that may not be revealed verbally.
Therefore, equal emphasis should be given to respondents‟ verbal
answers and body language in order that any meaningful message
conveyed through the body language may be revealed. This is to
ensure that the respondents are replying to each of the interview
questions clearly and honestly, thus minimising any potential errors
55. when the message from the response is extracted and analysed
The interview will help to minimise potential errors resulting from
misunderstanding or confusion as it allows the researcher to repeat,
rephrase or elucidate an interview question whenever necessary in
order to ensure that the respondents fully understand the question.
This gives a significant advantage of interview over other modes of
data gathering methods such as questionnaires or survey
The internet interactive discussion were one of the means in
conformity with the interviewee since, the interviewee and the
researcher unable to conclude a suitable time for a face to face
interview. Hence, to ensure data still able to be collected from the
respective interviewee this tool been call upon under such
Prior to conducting the interview, respondents were reminded of the
purpose of the interview and were given the assurance that information
obtained from the interview would be treated as confidential and be used
solely for the purpose of the study. In addition, the confidentiality terms were
also stated in the invitation letter and again at the opening of the interview
session where respondents were reminded of their right not to answer any
questions in unlikely event that the question may have compromised their
interest. Therefore, it is assumed that the willingness of respondents to take
part in the interview signified their consent. Each interview session will be
56. determine later on and the interview was recorded using a digital audio tape
recorder to ensure that respondents replies were fully recorded and to help
minimise any possible loss of data during data transcription process. To
safeguard the respondent interest, the full transcript of the interviews was
188.8.131.52 Panels / Interviewee
The interview process begins with the selection of Shari‟ah expert
having adverse knowledge on Islamic background as panel and under this
study context, the researcher acted as valuation practitioner. The selection
was done on random basis with decision based on their understanding on
property valuation industry, more than 20 years of experience, well-versed in
supervisory Board. They also knowledgeable in terms of issues and
challenges in practicing rules and principles of Islam. The panel came from
three prominent of Institution of Higher Learning in Malaysia. The expert or
panel is assessed from their work done or research interest that involved or
related with Shari‟ah compliances on economic and finance industry, since
there is no single expert having direct knowledge on property valuation with
Shari‟ah background. Subject to the limited panel and expert having in-depth
knowledge in this scope of study, therefore, only three panels being selected
57. Table 3.1: Panel Designation
Economic Studies, Conventional and
Islamic Law, Islamic Finance
Fiqh, Usul Al-Fiqh and Muamalat
These respondents will be sent a letter inviting them to take part in
the interview. It is worth mentioning here that all the respondents are
Muslims hence there is potential bias in the outcomes of the interview
analysis. Unfortunately, attempt to obtain non-muslim panel is impractically
can be done since the objective of this study, required the respondent to
have some ideas on Islamic principles and faith with it, hence it does not
recommended in including them.
It must be known that the limitation under this scope of tools is the
panel does not have adverse knowledge and expertise in property valuation
process and its method. But, they do have minimal understanding on current
property pricing method and issues pertaining on real estate industry in
Malaysia. That is why, at introduction of the interview session, the panels
being introduced with property valuation methods with a simple presentation
and the uncertainties and the application of risk-free rate being allocated as
focus elements in the explanation. Then, the open-ended discussion start
after the panels having ideas on the subjected issues.
58. 184.108.40.206 Open-ended Discussion
The interview was done on five stages subject of discussion to ensure
the data can be gather efficiently and effectively. The stages of discussion
First: Casual conversation for making the panels feels comfortable and feels
at-ease and willing to talk openly. Asking names, scope of study and
expertise and interest.
Second: Introduction on the Property valuation. Asking on accountability with
any property valuation parts within the industry. Bring up the general topic of
property valuation by giving time for the panels in responding and reflect
their knowledge on the study.
Third: The conversation and question becoming more specific on the
valuation methods discussed under the study. Discuss on the pertaining
subject of Gharar and Riba‟ as the benchmark in Shari‟ah context. Make
mini presentation on the preliminary study done on uncertainty in property
valuation methods and Gharar. One of the key in presentation is shown in
Table 3.2, where emphasize all elements studied under both valuation
methods; Comparison method and DCF Method. The possible type of
Gharar being mentioned during discussion, as also shown in the Table 3.2.
The Table 3.2 act as guidance to express towards the panels on the issues
in valuation methods that there are possibility those elements is not
permissible according to Islam.
59. Table 3.2: Risk-free Rate and Uncertainty Elements in Both Valuation
Methods with Possible Verification of Gharar Categorization
Risk-Free Rate Riba'/ as benchmark
Permissible Gharar Input in DCF Method based on historical data
Rate taken from various sources; e.g government bond rate
Also consider as uncertainty, benchmark in rate of return
Indicative value, unsuitable comparables, misguided
Permissible Gharar Used function/equation in generating the value
Subjective manner, fuzzy reasoning, lacking well-defined guidance
Permissible Gharar Future expectation is unpredictable, explicit nature, assist.in calculation
Permissible Gharar Subjectively done, possible risk carried based on types of property
(Source: Ground work done by researcher, 2013
Fourth: Key part of the interview.
Asking on the permissibility of the
uncertainty and riba‟ existence in property valuation method according to
Shari‟ah principle. Discuss on the basis of conformity and remark.
Five: Close the discussion by give panels final word. Give interview a
chance to summarize their positions and views.
220.127.116.11 Data Analysis in Qualitative Analysis Method
Since this study uses an open-ended questions approach, a set of
questions was prepared to stimulate discussion and to ensure that the
interview process would collect all information required and would not go
60. astray. In brief, the respondents were asked specific questions revolving
around the following issues:
The understanding towards existence valuation includes the
responsibility of Valuer, process of valuation, methods available to
Uncertainty in valuation. How much the uncertainty being consistent
with the interpretation of Gharar according to Islam?
Evaluation on the permissibility of the riba‟ existence‟, uncertainty
and other raised unethical concern according to Islam in property
Justification on unethical concern according to Islam as laid in
valuation practice. (Example; non-halal property usage, conventional
bank as panel bank in valuation firm etc.)
Opinion on valuation practice, fulfilling Shari‟ah compliance
Opinion on elimination of haraam/non-Shari‟ah compliance in
The qualitative data in the forms of interview transcripts or
observation notes obtained from the interviews were analysed. Under this
approach, the original data is transcribed into written format which is then
categorised and explore themes, patterns and relationships with the studies
done on the secondary data. The primary data will set as justification on the
available information as prescribe from the content analysis.
61. CHAPTER 4
RESULTS AND DATA ANALYSIS
This Chapter covers the result of discussion done with the Panels within the scope of
study. The quotation retrieved from the voice recorder mentioned below, according to
the reference number of Panels as tabulated in panels designation (refer to Table 3.1).
One of the principal interests of the Valuers is the requirement to verify that
valuations are put forward to client in a comprehensible and unambiguous means.
Provided that clients had change towards becoming cutting-edge in their decision
whether to purchase or sell the real estate, therefore the valuation model applied to
assess the most possible trade price should contemplate their thought process to the
magnitude that the process and result would influence the market.In the last 30 years,
there have been many court cases that have questioned the veracity of the Valuer‟s
valuation (see Crosby et.al, 1998). Hence, this study does not only look on the
permissibility of the uncertainty and risk-free rate in valuation method according to Islam,
but its also reviewing the issues of possible uncertainties arise from the earliest years of
valuation existence. It must be acknowledge by the Valuer to be responsible on all
course of action in undertaking in valuation assessment.
From the study on the available secondary sources, the risk-free rate applied in
the valuation method is used for the purpose of benchmark. Through open-ended
discussion with the panels, the rate as mentioned by them, acted as guidance for the
62. derivation of property‟s value. The study done on the content sources were supported by
the panels, as stated by Panel number 1;
“We live in a commercial world, where the execution of assessing the performance or
the value of an asset by weight up the return and risk to an appropriate-structures
benchmark is well established in a centralized-market of financial system…and markets
are magnificent in providing credible, measureable and compatible benchmarks for
distinct asset group and securities. In Islam, the economic system recommends the
application of return in the real sector as a benchmark for the return on financial industry,
hence it also as well applicable in the property valuation sector….”
To add with that, Panel number 2 also stressed the important to regards the rate
as benchmark for maslahah and he stressed the needs for Islamic benchmark
“Even though this practice has been accepted according to the law of necessity and also
in the lacks of better benchmark, it is believe that more people have brought up the need
to create or develop benchmarks based on the Islamic modes of rate of return”
The basis of ascertaining the input of risk-free rate in valuation method as
benchmark, it is anonymous based on the consistency answered by the all the panels,
the benchmark was required to assist the computation of market value of subject
property since without the benchmarking, Valuers will have no standard to be refer and
could cause moral hazard among Valuers in deciding the appropriate yield since
appropriate will have a different interpretation for each people. In the end, as stressed by
63. Panel number 1, without referring the risk-free rate as a benchmark could lead to
magnificent Gharar which will make the valuation as a prohibited Gharar, nonpermissible one.
Furthermore, Panel number 2 also said, “….after all, the benchmarking done
after analysis done on the prevailing market condition not simply taking the rate out of
nowhere…”. This statement also denounce another reminder that each Valuer had to
justified their analysis in the valuation report and avoid taking an easy means of
In terms of uncertainty behind the input of risk-free rate, as validate by all three
Panels it is considered as permissible Gharar. Added by Panel number 3, “Instead of
concerning substitute the benchmark with other option of Islamic mode of return, care
should be more on each valuation had to be more transparent, justifying and prudent to
ensure faith in all valuation done by professional Valuers”.
As according to Askari, Iqbal & Mirakhor (2009), they also relates with the
practice of return from the interest in prevailing conventional market by addressing direct
conflict by several researcher on the practice of using interest-based benchmarks such
as the London Interbank Offer Rate (LIBOR) in Islamic financing. Other different kind of
models can estimate the rate, such as Capital Asset Pricing Model Hence, for the
development of Shari‟ah-compliant valuation, the application of risk-free rate could be
substitute with potentially Shari‟ah-compliant rate of return such as the Islamic Bond
rate. But on 2008, Shari‟ah Board of Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) printed a testimonial signifying that musharakah and
64. mudarabah Sukuk (Islamic Bond) with the “credit enhancement approach” instruments
as applied by the market was not in accordance with the Shari‟ah principles. Hence, it
seems the future for a better benchmark cannot take place within the next few years,
since the developing of such rate might take few years to create and other years for
With supported hadith from Rasullullah (pbuh), there were no means or level of
yield appropriate for each asset trading in the market. Rasullullah (pbuh) does not want
interfere the allocation of ceiling return in market since it would cause injustice the
traders or sellers, but as explained by them during the years of Rasullullah (pbuh) the
price is determine fairly unlike nowadays in Malaysia where the market is unfair towards
certain people in the society. The market is mix with speculation, even such element
existed but with analysis back up in valuation done, the amount uncertainty still
Then, the interview lift up to the uncertainty in both valuation methods. Unlike
riba‟, Gharar is not definite therefore, it requires expert justification to ascertain its
permissibility with Islam law. The uncertainty lies in Comparison Method is permissible
Gharar as mentioned by Panel number 2,” …..Islam accepts price differences especially
after consider the location variability and even with such indicative value or price
determination without professional advice, the cases were not absolute that affect the
total average price or values in the market.”
65. Hence, they evaluate the uncertainty of price or sale price in comparison method
as permissible Gharar, but cautious towards the Valuers to ensure all adjustment,
analysis and justification was made especially during thin market where the suitable
comparables data is very limited or applying other method to support the valuation.
While uncertainty within the adjustment process, the issue of uncertainty lies
from the incompetency of the Valuers and lacks of proper standard of guidelines. Hence,
as suggested by the Panel number 1;
“…intensive study on the economics forces within real estate and the current condition of
market in a country, at the last semester or year could benefit the Valuer before entering
the industry, and proper mathematical theory in adjustment allocation could be establish
as guidance for potential Valuer…”
For each assumption it is extracted from past valuation after conducted
adjustment on appropriate comparison using similar professional discernment. The
assumption amount were believed to be most suitable, but for each inputs there will be
no 100% confidence due to market anticipation of future and future is uncertain. This
uncertainty had to be relay to the end-user or client. It is now accepted that the fact is
valuation is uncertain and it is not the downward side or the end of professional
judgement but alternatively, a beneficial enhancement to the process as it enable the
valuation user to understand the valuation figure in certain circumstances.
As a good reminder to all the Valuers, careful analysis had to be done on the
comparables use since as the market comprises speculated price or price that will bring
injustice towards other party, the Valuers had to gather means in allocating the area or
66. properties have such elements to avoid using it as comparables, but it is not fair to
provide Valuers more responsible effort without other authority concern. The
recommendation on involvement from other entity will be further mention in next chapter.
Without overlooking on the uncertainty lies in the DCF Method, the forecasting
elements in the valuation is actually assist the valuation in more detail manner, Panel
number 2 relates this element with the financing calculation method as such Bai‟
Bithaman Ajil (BBA), where involved forecasting in number of years at certain
predetermined rate annually. As said by the Panel;
“…the forecasting also required analysis at certain S.O.P (standard and procedure)
hence it is permissible and acceptable to conduct such way even in property
valuation…” The third interviewee added “….Property Valuation in Malaysia still in a
development process, possibly this uncertainty can be reduce with more certainty in
futures by having conclusive and more property analysis after more property data
available in the market which this data make analysis such as property index is possible
to be release”.
The other uncertainties in DCF methods; risk premium and rental growth which
the uncertainties arise from the market forces but since it is unavoidable the elements of
Gharar in both part is considered as normal phenomenon in the market as concluded
from the discussion. This type of Gharar as mentioned by Zaharuddin Abd Rahman
(2008), Gharar can be considered minimal, if it is not outrageous or absolute in the
contract and where the consequence on the economy and society. This kind of element
is more or less impossible to get rid of from the market and it is accepted by Shari‟ah. A
67. bulk feature of Gharar in commercial activities is forbidden according to Shari‟ah since it
will influence the legality of a transaction. Once again, mindful of that unlike riba‟, Gharar
is an exceptional issue which is free for adaptability on different situation. As stated by
Panel number 2 “…due to technology development and its changes over time, what
comprise Gharar in a certain place or time might not be Gharar in other certain situation
or state of affairs….”
The used of technology in property valuation method is already discussed in the
literature review, as by applying the technology it is believe these uncertainties effect
could be reduce and bring valuation becoming more transparent in providing reasoning
for all the input computed in the process done.
Ultimately, the uncertainties in valuation is permissible according to Islam and the
existence of risk-free rate in the valuation method act as a benchmark to assist Valuers
in coming up with an appropriate yield and output. But some recommendation and
improvement to reduce amount of uncertainty were stressed out by the panels, and
those suggestion will be stated in the next Chapter.
68. CHAPTER 5
CONCLUSION AND RECOMMENDATION
The uncertainty in property valuation method is unavoidable since, the
uncertainties arise from the market forces and the nature of the method itself. The use of
risk-free rate consider as benchmark not as riba‟ as defined by Ulama‟ or Shari‟ah expert
to ensure the price is competitive in the market. But still other technique or other reliable
source could be suggested in come up with Islamic mode of risk-free rate. Definitely, the
development of Shariah-compliant valuation is still new and it is not preferred to be
discuss on the necessity, but there were issue on the use of profit method in the
valuation of non-shariah compliance business activities such as bars, clubs or cigarshop is questionable since its base on the activities not the space, hence as according to
Islam such application is not permissible. Hence, the application of valuation method
should also being accordance to the activities not solely on the purpose of valuation
according to Islamic principles.
The uncertainty from the comparables could be minimise from the involvement
from the authority especially from the government as stressed by the first panel, since
the market existed speculation or as mentioned in literature review, the price from the
selling of property is not from the professional advice or guidance, therefore, the
government had to intervene from the ground to avoid the inappropriate price or values
being opt as comparables. The price or value need to be control so that the selling price
is determined fairly.
69. As mentioned by Wahbah Zuhaili (2009) in his book, one of property type,
residential is a basic needs towards each people in the earth. In Islam, government act
as a trustee on property belongs to Allah S.W.T. As a trustee, government had to divide
the property and others wealth resources in the earth for the use and enjoyment of all
human beings according to the laws stated by Allah S.W.T. Likewise Islam recognizes
and acknowledges the rights and freedoms of an individual to own property in a way that
allowed. As far as we concern, the yield as applied in valuation method were analyse
and input at allowable means, as long as the computation and analysis done were justify
in the report.
But, towards adjustment done in valuation, an improvement had to be done in
creating or providing a guideline to all the potential Valuers and the existed Valuers on
how much and how to justify or reason out all the adjustment done, hence the
subjectivity or the uncertainty from the knowledge or experience of the Valuer can be
reduce. It is, without doubt, the valuation methods required an impeding guidelines or
standard in assisting new and existed Valuer entering industry. By preference, at the
essence of the problem rest the issue of transparency and clear-cut of the outcome from
valuation process (no matter which valuation method used) such as means in which
Valuers convey their assumptions, statement for uncertainties and liaise the outcomes of
the valuation process to the client or end-user of the report. Therefore, each Valuers
must have a manual how to come up with the adjustment, not simply by thoughts or
Since valuation is much related with the market condition therefore, all pertaining
analysis done in allocating the uncertainty should be appended with the valuation report.
70. In those circumstances where uncertainty are reported according to RICS Appraisal and
Valuation Manual (RICS, 2996) or Red Book the Valuer can claim, with some
justification, that best practice has been satisfied, not just from the valuation industry
itself but from the Islam context also being satisfied.
More specifically, the interviewee also concluded that an alternative method is
required that integrate the analysis of uncertainty with thorough probe on property and
market uncertainty. Carsberg (2002) emphasized the need for more acceptable methods
of expressing uncertainty, particularly when information is deficient. The report stated
that professional bodies representing bodies representing both Valuers and end users
should agree an acceptable methodology for reporting uncertainty within the valuation,
which can be readily communicated to third parties. It is stressed that the methodology
should being understandable and should not confuse end users. 1996 Red Book seeks
to lay down clear standards and guidelines which will assist both the Valuer and the
client in interpreting the valuation in the correct context. This Book had to known and
refers by all the Valuers in conducting their valuation.
It should be apparent that, for all the uncertainty discussed, there is no exact
technique that Valuers can deal to make the uncertainty become certain, but there are
ways to minimize in instance, from the use of probability theory but still the application is
being critique on the reliability towards technology rather than the human systems.
Mallison and French (2000) suggest adopting, statistical approach to the resolution of
the uncertainty issue. In relation to the range of the most likely observation it is
recommended that the Valuer should set the upper and lower figure in elements which
they believe having potential uncertainty. In other way, Scott, Gronow and Rosser (1988)
71. suggested to reduce the uncertainty amount in valuation method they came up with a
system that regarded as a number of sub-systems serving the main valuation program
as shown in Figure 5.1. Within each of the sub-systems clear-cut feedbacks to the main
program which produce the valuation figure. But the treatment on the use of this system,
should be seen where it is applicable and needed such as when the market just facing a
bubble in the property segment.
Figure 5.1: The Modular Expert System
(Source: Scott, Gronow and Rosser, 1988)
Some way, this research paves the way for the introduction of new method,
which would be easily understood and be applicable across all property.
72. Gharar in valuation method is consider in the face of necessity for the valuation
can be done, given that this need is both general and specific and there is benefit
(Maslaha) from the given method and valuation.Individual Valuers must take the issue of
uncertainty into their own hands and offer the end user or client what they feel is their
best price estimate from the method applied. Refer back to primary book of review,
Quran which to establish a moral social order on earth. It requires human kind to work
on the basis of brotherhood and cooperation with as sense of God consciousness. Even
in conducting valuation, the Valuers or other related interested interest in property
valuation should therefore be driven by these Quran realities. As such, when there is
defect on the property, Valuer should not hide it from the knowledge of the client or end
user as it is consider as Haraam according to Syara‟ as Rasulullah S.A.W said; “A
Muslim is the brother of another Muslim. Should not be for a Muslim to sell something to
his brother while the goods have its defect or flaws unless he explains to his brother the
defects”. Thus, any input that would cause injustice towards the client or end user had to
All Valuers had to be aware and knowledgeable on the existence of uncertainty
in valuation methods used. Therefore, they can avoid making errors and injustice
towards the end user.
The two valuation methods; comparison method and DCF method of uncertainty
is permissible after considered the favorability of both methods compared with others
and the uncertainty elements is required and assist the computation of property value.
But, much improvement on existed methods or creation of other method to ease in
appending justification or reasoning on the methods were required in order the valuation
process is clear and transparent to give justice to all interested individual. In each
73. property valuation work depends on the data available and how much certain for each
input, choosing appropriate method would give justice if the element of uncertainty is
The government also plays key roles in controlling the prices and value of the
property in the market. The authority also should initiate work on constructing property
indices or other property-related benchmark to guide people in the industry and other
key players. With this, the property market is fairly value and traded among different
income-group of people. This research suggests further study on shariah-compliant
valuation model and property-related index requirements in future.
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