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SCMP Reporter

DISCLOSURE of information is a key issue for the Securities and Futures Commission and the Stock Exchange of Hong Kong as they attempt to provide the territory with the framework appropriate for a global financial centre.

  The introduction of guidelines yesterday on the type of information that should be provided with valuation reports of property in China and other emerging markets demonstrated their resolve to offer investors the opportunity to make intelligent decisions.

  Although the guidelines are a step in the right direction, the SFC and stock exchange concede that difficulties remain when valuing property in China because of the lack of evidence of comparable market transactions.

  This task is easier in Hong Kong because the property market is liquid, well-developed and provides information on comparable transactions.

  In China, however, market evidence is difficult to obtain and market conditions vary from city to city.

  As a result, the SFC and stock exchange said valuers often used the ''residual method'' of valuing a property by valuing the development potential of a site.

  This method involves the valuer deducting the estimated total cost of the development from the estimated sale proceeds.

  The number of variables involved in these calculations and the lack of reliable data for mainland properties require much fuller disclosure and warnings as to the reliability of data and the kind of assumptions made.

  The guidelines require, therefore, that where the valuation has been prepared on the basis of comparable transactions in an open market, this must be stated with a description of the valuation method used.

  The gross development value of the various components of the proposed development must be included, along with the construction cost, based upon the report of a properly qualified quantity surveyor.

   All fees to be charged must be disclosed, as well as the developer's profit.

   The guidelines also cover joint venture interests, whereby a description of the significant terms of the joint venture arrangements should be set out, including a description of the equity and profit-sharing arrangements of the parties to the agreement.

   In addition, any opinion should state whether the joint venture company has obtained all necessary licences to operate where the property is, and a summary of the opinion should be disclosed in any valuation report and in the relevant document.

  In terms of a valuation report's contents, the guidelines stipulate that when a property has been valued on an open market basis but not by reference to comparable market transactions, the valuer may be required to discuss and disclose the assumptions underlying the open market valuation method.

  Valuers may also be asked to justify the assumptions they have made in the valuation report, particularly where local market conditions or legal circumstances differ greatly from those in Hong Kong.

  The valuer must also clearly state the nature of the interest being valued, taking account the content of legal opinion provided relating to the relevant property.

  The valuer must clearly state whether the valuation is of a vested legal right or of a right to acquire a vested legal right to the relevant property or, for example, a right to occupy the relevant property for a fixed period or to enjoy rents or other income.

  Another important consideration is the establishment of title. The guidelines require that a valuation for any property must state whether the party has vested legal title and contain a statement of any material conditions affecting title.

  For property in China, a long-term land-use right certificate will be treated as the equivalent to the Hong Kong legal concept of vested title to the property.

  The listed applicant or listed issuer should confirm whether a long-term land use certificate has been obtained by the relevant party.

  The exchange may require production of a land use certificate and may require it to be available for inspection.

   These guidelines will probably cause a great deal of confusion initially, but the stock exchange has wisely decided to encourage new applicants and listed issuers who buy or intend to buy property in a developing market to contact the Listing Division for confidential advice on what they should do.



Property valuation rules are solid start