Real Estate Conference Focuses on Valuation Standards

Real Estate Market & Outlook Conference
2016, Phnom Penh, Cambodia
Mr. Sim Hoy Chhoung
CPA & Certified Valuer
CEO,
Vtrust Appraisal Co., Ltd
Strengthening Property
and Financial Markets
Through Sound
Valuation Standards
The views and opinions expressed in this article are those of the author and do not
necessarily reflect the official position of VTrust Appraisal Co., Ltd.
April 1st , 2016
Phnom Penh Hotel,
Phnom Penh.

Agenda
I. Introduction
II. Valuations for Financial Reporting
III. Valuations for Secured Lending
A. Case Study and Recommendations
IV. Property Market and Banking Sector – Cambodia
V. Valuation Standards and Applications – Cambodia
VI. Well Recognized Professional and Valuation Standards
VII. Conclusion
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I. Introduction - To Set the Scene…
There are growing concerns of financial regulators and stakeholders for better
identification and communication of uncertainty in valuations
• 2008: The financial Stability Forum (FSF) published an analysis of the
causes and weaknesses that had produced the turmoil in financial markets
asking for more transparency in valuations.
• 2009: the G20 Declaration on Strengthening the financial System called for
improved standards for valuation uncertainty in the context of fair value
accounting.
• 2009: The Basel Committee for banking supervision issued its paper
Supervisory Guidance for Assessing Banks’ Financial Instrument Fair Value
Practice
• 2010: the Financial Services Authority (UK) published recommendations for
the specific assessment of valuation uncertainty.
Source: RICS Presentation, www.ricseurope.eu

I. Introduction
- “Risk in property market crisis can threaten the stability of the whole
financial sector, ” H.E Kim Vada, Director General of Banking Supervision,
National Bank of Cambodia, Presentation on 18th August 2015 at
Cambodiana Hotel
- “(There need to be) a strengthening of professionalism in the valuation
practices,” Kim Vada, National Bank of Cambodia, Presentation, 18th
August 2015.
- “Accurate and professional valuations are vital to a healthy property
market and a stable economy, forming the basis of performance analysis,
financing decisions, transactional or development advice, dispute
resolution and taxation,” Royal Institute of Chartered Surveyors (RICS)

I. Introduction – Uses of Valuation Services
2MainApplicationsof
Valuation
Valuation for Financial
Reporting
Valuation for Secured
Lending
Others: M&A, Buying,
Selling, Renting, Tax
assessment,
Insurance
Subjects of Valuation
Real property
Personal property
Business interest
Intangible assets
Plant & equipment
Trade-related property etc.

II. Valuation for Financial Reporting
Increasing Role of Valuations for Financial Reporting

II. Valuation for Financial Reporting
• The importance of fair value and similar measurements in financial reporting
mandates corresponding high-quality valuations.
• The financial crisis 2007-2008 highlighted the interdependency of the global
financial markets, and the increasingly prominent role that the valuation
profession plays in these markets.
• the valuation profession needs to address questions about the quality,
consistency, and reliability of its valuations, particularly those performed for
financial reporting purposes
• Having a substantive global valuation technical framework that is principles-
based will improve the consistency, better comparability across the financial
markets and increased confidence in the valuations performed.
PwC Called for Global Valuation Standards
Source: Point of View, Global Valuations Standards, PWC, 2013

III. Valuation for Secured Lending
• A poor or inadequate legal framework that does not allow for the efficient
functioning of the property market.
• The lack of published information or difficulty in obtaining information regarding
transactional as well as other data requisite for proper valuations.
• Greater volatility of property market
• Lack of adequately trained professional valuers
• Outdated National Valuation Standards
Valuations in emerging markets: Common Characteristics
Source: International Valuation White Paper, International Valuation Standards Committee (IVSC)

1. Commercial banks and other lenders must ensure compliance with IVS
application, Valuation for Secured Lending. Valuers must be
independent/External valuers
2. Lending institutions should clearly specify in writing the conditions of
engagement and instructions for the assignment at the outset.
3. Banks and other financial institutions should recognize the importance of
valuations undertaken by professionally qualified valuers who comply with IVS
and this white Paper
4. Institutions with regulatory functions over the valuation profession should
ensure adequate opportunity for its development as this profession is central to
the proper functioning of the property market and by extension the economy.
Valuations in emerging markets: Recommendations
Source: International Valuation White Paper, International Valuation Standards Committee (IVSC)

Primary Weaknesses in
Valuation Process
Observations Recommendations
1. Weaknesses in
instructions given to
valuers:
Poor valuation
instructions were a
contributing factor to
the level of property
losses incurred by
Lenders. Valuations
based on vague
instructions provided
inaccurate values and
therefore inaccurate
assessments of risk at
the time of underwriting.
- Banks should standardize
all valuation processes to
provide for consistency
and accurate analysis
across loan portfolio.
- Letters of instruction
should be incorporated
into the valuation report to
ensure that the basis and
assumptions are as
required.
A Case Study: The Central Bank of Ireland, Valuation Processes
in the Banking Crisis - Lessons Learned – Guiding the Future,
Dec 2012

Valuation Process
2. Conflicts of interest: During the volume
led transaction
phase of the boom
in property
development,
certain valuation
practices were
accepted by credit
institutions that
involved significant
conflict of interest.
- The valuers’ duty of care is to
the banks and should be
emphasized by banks in their
written instructions.
- Banks should require valuers
(or their firm) to disclose any
material involvement in a
property in the valuation
report.
Dec 2012

Valuation Process
2. Conflicts of interest:
(Continue)
During the volume
led transaction
phase of the boom
in property
development,
certain valuation
practices were
accepted by credit
institutions that
involved significant
conflict of interest.
- Instructions to valuers should
come from bank staff who are
not dealing directly with loan
clients.
- Fees should only be
discharged by banks.
- Valuation reports should
always be addressed and only
delivered first to the bank that
is advancing the loan funds.
Dec 2012

Valuation Process
3. Valuer panel
management:
There were weaknesses
in the appointment,
utilization and
performance review of
valuer panels by banks.
This included the
utilisation of valuers
without appropriate
experience, qualifications
and professional
indemnity insurance for
the particular assignment.
- Banks should have a
properly approved panel
of valuers using
appropriate selection
criteria.
- It should have on-going
assessment review of
panel performance
including a review of
professional indemnity
insurance.
Dec 2012

Valuation Process
3. Valuer panel
management:
(continue)
There were weaknesses
in the appointment,
utilization and
performance review of
valuer panels by credit
institutions. This included
the utilisation of valuers
without appropriate
experience, qualifications
and professional
indemnity insurance for
the particular assignment.
- Banks should ensure
that no one firm of
valuers has the bulk of
their valuations.
- Consideration should
be given to having no
one valuer doing more
than, say, 33% of all
valuation reports.
Dec 2012

Valuation Process
4. Frequency of valuation
review:
Credit institutions
often failed to
conduct regular
valuations,
thereby avoiding
the issue of
recognizing value
diminution
resulting in under-
assessment of
impairment
provisions.
- Banks should have clear policy
and guidelines governing
valuation frequency, at least
annually.
- Where there has been a
material change (positive or
negative) to the property by way
of zoning, planning permission,
densities, compulsory purchase
order, transport links, etc. a
revised valuation of the property
should be sought.
Dec 2012

Valuation Process
5. Inappropriate use of
informal valuations:
During the property
lending boom, there
was increased
reliance on informal
valuations by credit
institutions. These
were utilised as if
they were full
valuations. To
properly assess risk
during lending
reviews, full
valuations are
required.
- Banks should have
appropriate processes in
place to flag out-dated
valuations and to trigger full
re-valuation. This can be in
line with appropriate review
dates for the loan itself.
- Loan templates should
provide a summary of the last
two valuations and specifically
when the last full independent
valuation was done with less
prominence to “informal
valuation updates”.
Dec 2012

Valuation Process
6. Training was
inadequate:
There was
inadequate training
regarding collateral
valuation
methodologies,
interaction with
professional
valuers, the
interpretation of
valuation reports
and the importance
of valuations in
credit risk
assessment.
- the knowledge gaps in
valuations are identified and
closed out through training.
- the Relationship Managers
and Credit Risk staff are
specifically trained in property
valuation methods and
processes.
- Banks should consider the
establishment of in-house
expertise to inform in-house
training requirements and
standards.
Dec 2012

IV. Property Market and Banking Sector- Cambodia
- GDP growth at 7% in 2014 and estimate at 7% for 2015
- In 2014, Construction sector contributed 17.2% to GDP growth, while real estate
sector contributed about 10.9%.
- The construction and real estate absorb an estimated labor force of about
38,000 to 45,000 workers daily throughout Cambodia, while in Phnom Penh
alone the number is 8,000 to 12,000.
- The growth of the sectors help reduce emigration and push the growth of sub-
sector such as property valuations, management and agency, engineer and
architecture etc.
Property Market
Source: Presentation by H.E Mey Vann, Director General of Financial Industry Department, MoEF, 17th July 2015

- Factors that have driven the real estate market during the last 5 years includes:
Property Market
Source: Presentation by National Bank of Cambodia, 17th July 2015
Growth
of Real
Estate
Market
Rising
middle-
income class
Growth of
Population and
change of
demographics
Favorable
Business and
economic
environment
Growth of
FDIs
Growth of
Credit
Availability
New law on
foreign
ownership of
property

- Lending has been growing steadily after the financial crisis 2007-2008
Banking Sector – Loans Outstanding
Balance
Outstanding
(US$ in Millions) 2008 2009 2010 2011 2012 2013 2014 June- 2015 2015P
Total Loans 2,409.38 2,512.92 3,226.50 4,377.29 5,947.83 7,469.37 9,530.98 10,676.37 11,959.41
% YoY Change 4.30% 28.40% 35.67% 35.88% 25.58% 27.60% 12.02% 25.48%
Real Estate Sector 545.81 463.55 495.40 739.05 960.97 1,227.34 1,758.05 2,022.14 2,325.89
% YoY Growth -15.07% 6.87% 49.18% 30.03% 27.72% 43.24% 15.02% 32.30%
Of which
Housing 175.50 89.69 116.75 271.40 329.98 398.94 602.50 699.09 811.16
% growth -48.89% 30.17% 132.46% 21.58% 20.90% 51.03% 16.03% 34.63%
Construction 189.61 216.04 227.70 326.05 446.82 577.37 775.28 889.41 1,020.34
% growth 13.94% 5.40% 43.19% 37.04% 29.22% 34.28% 14.72% 31.61%
Others 180.70 158.17 150.59 139.84 183.58 250.53 379.42 433.33 494.90
% growth -12.47% -4.79% -7.14% 31.28% 36.47% 51.45% 14.21% 30.44%
Source: National Bank of Cambodia, Presentation by Kim Vada, 18 August 2015

- High and volatile growth of the property sector
- High non-performing loans (NPL) at 0.25% of the total NPL of 2.66%
- Shadow Banking Operations
- Shortage of long-term capital and liquidity risk
- Relaxed standards of loans underwriting/originations
- Property price overvaluation and speculation
- Lack of data for detailed analysis of the sector
Banking Sector – Challenges for the Real Estate Sector
Source: Presentation by National Bank of Cambodia, 17th July 2015

V. Valuation Standards and Applications - Cambodia
- Multi standards – no standard at all
- Cambodian Valuation Standards – in Khmer
- Prepared by the Financial Industry Department, Ministry of Economy
and Finance (MoEF)
- Consist of 11 standards, 40 pages, no update and focus only on real
property valuations
- Two legal frameworks by the MoEF regarding valuation practices:
- Prakas on the management of valuation services, real estate agency and
management (modified)
- Laws on the management of valuation services and real estate agency
(Draft)
Valuation Standards

V. Valuation Standards and Applications - Cambodia
- Cambodian Valuers and Estate Association (CVEA) is working with Asean
Valuation Association (AVA) to promote “One ASEAN, One Valuation
Standard”
- CVEA has signed MoU with its counterparts from Singapore and Malaysia
as well as RICS regarding training in the property sector
- There is no minimum CPD training requirements for valuers
Valuation Standards

V. Valuation Standards and Applications in Cambodia
- Mostly Valuations for Secured Lending
- The need for valuation for financial reporting is growing gradually as
Cambodia is adopting the IFRSs, with some modifications, for applications
to both listed and unlisted firms
- There are 134 licensed real estate agency and valuation firms, of which
87 are members of CVEA as of February 2016 (source: CVEA)
- There are 70 certified valuers recognized by the MoEF as of August 2015
(source: MoEF)
Valuation Applications

V. Valuation Standards and Applications in Cambodia
- Only few big valuation firms are able to acquire Professional Indemnity
Insurance
- Current Lending Practices –
- Relaxed Standards of Loan Underwriting (some institutions)
(Presentation by Kim Vada, National Bank of Cambodia, 18th August
2005 at Cambodiana Hotel)
- Valuation for Secured Lending is characterized by weaknesses as
described in the Case Study and the IVS White Paper -valuations in
emerging markets
Valuation Applications

- RICS was created in 1868 in the United
Kingdom and is the world's leading
professional body for qualifications and
standards in land, property and construction.
- International headquarters in London, with
world regional offices in Brussels, Dubai, Hong
Kong, New York and Sydney
- Over 100,000 qualified members in over 146
countries
- 500 industry research and policy papers
published every year
The Red Book

• RICS Professional Standards (PS) – Mandatory
• PS1 – Compliance with standards and practice statements where a written
valuation is provided.
• PS2 – Ethics, competency, objectivity and disclosures
• RICS Global Valuation Practice Statements (VPS) – Mandatory
• VPS 1 – Minimum terms of engagement; VPS 2 – Inspections and investigations;
VPS 3 – Valuation reports; VPS 4 – Bases of value, assumptions and special
assumptions
• Valuation Practice Guidance- Application (VPGA)
• Valuation for Secured Lending and Financial Reporting
• Subjects of valuation include real property, plant and equipment, Business
Valuation, trade-related property, intangible assets, portfolio of properties.
Outline of the Red Book

• Introduction
• The IVS Framework
• IVS General Standards
• IVS Asset Standards
• IVS Valuation Applications for Financial Reporting
and Secured Lending
• Technical Information Papers on valuations of subject property such as real
property, plant and equipment, Business Valuation, Investment property
under construction, trade-related property, intangible assets, financial
Instruments,
Outline of The White Book (IVS)

V. Conclusion
• The growth of property and financial sectors as well as the increasing numbers
of valuation practicing firms call for the discipline and professionalism in
valuation practices
• The introduction and implementation of sound valuation standards are essential
to the consolidation, sustainability, transparency, efficiency of property and
financial markets in Cambodia.
• Cambodia needs professional standards that can:
• Protect clients and consumers through a strict code of ethics
• Provide impartial advice, analysis and guidance to valuers
• Ensure quality of valuations and creditability of valuers
• Provide consistency and comparability across markets
• Cover beyond real property

V. Conclusion
• Policy makers may need an updated local standards, incorporating
internationally recognized ones such as The Red Book or The White Book
or completely adopt the books with minimal modifications like the case of
Cambodian accounting standards
• The regulators, in collaboration with CVEA, should develop appropriate
regulations for full implementation of the adopted standards which should
cover valuation practices beyond property
• Publicly accessible central market database should be initiated
• CVEA needs to be entrusted with more membership regulatory authority
in maintaining the highest educational and professional standards

V. Conclusion
• CVEA and the Ministry should work in continually upgrading valuer’s
knowledge through minimum hours CPD requirements
• CVEA and the regulators should encourage more valuation training
courses in schools, universities, associations.
• Banks and other lending institutions should enforce the best practices
valuations for secured lending.
• In addition, banks, especially local banks, should consider the best
practices recommendations set out in the case study in order to improve
its loan origination or underwriting and risk management process.

Thank You !
About Vtrust Appraisal Co., Ltd:
- Real Property Valuations
- Plant, Machinery & Equipment
- Business Valuation
- Hotel Valuation
- Pre-IPO Valuation
- Research & Consultancy - Real Estate Projects

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