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Investors welcome new initiatives to develop international valuation standards

Goola Warden
Goola Warden • 6 min read
Investors welcome new initiatives to develop international valuation standards
SINGAPORE (Oct 14): More than two years after minority unitholders of Sabana Shari’ah Compliant Industrial Real Estate Investment Trust (Sabana REIT) kicked up a ruckus over the valuation of three acquisition properties that they believed were overvalue
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SINGAPORE (Oct 14): More than two years after minority unitholders of Sabana Shari’ah Compliant Industrial Real Estate Investment Trust (Sabana REIT) kicked up a ruckus over the valuation of three acquisition properties that they believed were overvalued based on master lease rents, Singapore is embracing global valuation standards.

The Lion City hosted the annual general meeting of the International Valuation Standards Council from Oct 7 to 9. On Oct 10 and 11, IVSC and the Institute of Valuers and Appraisers of Singapore (IVAS) held their annual international business valuation conference at Marina Bay Sands.

IVSC is a not-for-profit organisation that acts as the global standard setter for the valuation profession. Deloitte, EY, KPMG and the CFA Institute are among its many sponsors. Its aim is to develop high-quality international valuation standards that ensure consistency, transparency and confidence in valuations globally, and encourage the adoption of IVS. On Aug 30, Savills became a member of IVSC.

Even as Singapore has embraced global valuation standards, its disclosure-based regime means it is up to individual companies to disclose their valuation reports to the investing public. For instance, on Sept 19, Manulife US REIT disclosed a 56-page valuation report on its latest proposed acquisition, 400 Capitol Mall, in Sacramento, California. On the other hand, the full valuation report of One Twenty Five, an office complex in Dallas, was not disclosed publicly when Keppel Pacific Oak US REIT announced its acquisition on Sept 6.

Cynthia Ng, managing director of valuation and advisory at Savills’ Singapore head office, says valuation reports are only for shareholders and not investors. “Shareholders can request to inspect the full valuation report for IPOs and related purposes,” Ng says. What about investors who would like to become shareholders? Ng replies that the Singapore Exchange and Monetary Authority of Singapore thoroughly examine prospectuses and other documents that are required for IPOs, rights issues and preferential equity offerings. “Valuers are answerable to the independent financial adviser, MAS and SGX,” she adds.

Eric Teo, head of business valuation and advisory at Savills’ Singapore head office, says: “Singapore has adopted international valuation standards, which promotes consistency in the way valuers perform their work. This will bridge the gap in the marketplace for valuations, which is critical for Singapore as a major financial centre.

“With the efforts put in by various stakeholders in the marketplace, we believe the quality of valuation data that markets rely on to support transactions, investments, M&A activities, financial reporting and so on will improve over time. Reliable valuations are crucial, as they de-risk markets and foster financial stability. It is in the interest of all to ensure that we continue to build trust in valuation and protect the public interest.”

A couple of locally listed companies — now suspended — have come under scrutiny for valuations of certain assets. For instance, the assets in Noble Group are now the subject of an inquiry, and there are questions over how Hyflux valued Tuaspring Integrated Water and Power Project. As at Dec 31, 2017, Tuaspring was valued at more than $1 billion as an asset held for sale in Hyflux’s balance sheet. Yet, on May 18, the Public Utilities Board took over Tuaspring.

In 2017, minority unitholders of Sabana REIT requisitioned an extraordinary general meeting to remove the manager. The EGM and annual general meeting — both contentious — were held in April that year. Unitholders did not get sufficient votes to oust the manager, but the latter lost its general mandate that year. In addition, Sabana REIT did not go through with the acquisitions of the three properties. In particular, its 47 Changi Avenue 2 property — an interested party transaction from then sponsor Vibrant Group — was a point of contention, as it was valued on the basis of a master lease rental that was above market rent at the time.

Now, according to Ng, master lease valuations need to be cleared with SGX before they are released to the investing public. “For property valuation, not everything is cash flow. When we conduct valuation for a REIT, we run a few methods, DCF, income capitalisation, direct comparison and cost method,” Ng says. DCF refers to discounted cash flow, which uses cash flow based on estimates outlook discounted back to net present value. DCF is also popular when valuing companies with lots of intangible assets, infrastructure projects and properties in REITs.

Income capitalisation is a method used for income-producing properties, where income is “capitalised” using a capitalisation rate. Determining the capitalisation rate is part of this approach.

The cost approach determines the price or replacement cost of a property based on the land cost and the cost to build the building.

For businesses and listed and non-listed companies, valuation is an important factor for investors simply because it determines the economic value of that asset. In addition to DCF, there are many ways to value an asset or company, and much also depends on economic conditions and interest rates at the time of valuation.

Some investors use cost of capital and weighted average cost of capital when gauging valuation. Here, capital asset pricing models are often used. CAPM requires three factors: the risk-free interest rate; the equity risk premium; and the beta coefficient. Investors also look at enterprise value, market valuation multiples and comparable transactions when considering M&A.

One of the largest M&A in the local market for some years was CapitaLand’s acquisition of Ascendas-Singbridge in an $11 billion transaction, which was completed on June 30. The valuation of ASB was arrived at on a “willing-buyer-willing-seller” basis, taking into account ASB’s combined enterprise value of $11 billion and its net debt and minority interests of $4.9 billion.

CapitaLand’s independent shareholders voted overwhelmingly for the acquisition on April 12. It was not just the current valuation of the unlisted ASB that swayed CapitaLand’s independent investors but future prospects of a larger, more diversified and stronger CapitaLand 3.0. In addition, investors were assured that the group’s dividend policy of declaring at least 30% of annual cash net profit remained unchanged.

Valuations require lots of assumptions — cash flow, interest rates, economic conditions and outlook, to name a few. “Valuation involves estimates. As a valuer, when you follow international valuation standards, you have to look at these estimates, the assumptions that underline these numbers and ensure that they are reasonable. Valuation is time-dependent. [The question to ask is] at the point when the estimates are made, are they reasonable? Timing is important. No one is able to tell the future,” Teo says.

The IVSC AGM and subsequent IVSCIVAS conference could shed more light on valuation methods, and that is a positive development for investors.

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