Jurisdiction - Hong Kong
Hong Kong – The Year Of The Horse For Valuers And Surveyors: What Does 2014 hold?

27 January, 2014


Legal News & Analysis – Asia Pacific – Hong Kong – Insurance & Reinsurance


The Hong Kong market starts 2014 divided about the prospects for its property market, both commercial and residential. Some leading developers and market commentators see the worst as being behind us; many predict modest reductions in value over the year; some foresee quite dramatic decreases of up to 30%.


If the more negative predictions prove correct, the role played by valuers and surveyors will receive additional focus. Similar to the UK experience in recent years, exposures for valuers will potentially increase. The Hong Kong Stock Exchange (HKEX) is conscious of this given the importance of property in Hong Kong. HKEX issued guidance to listed companies in late 2013 specifically addressing property valuations and disclosures to the market.


We take this opportunity to review the UK Context, HKEX Guidance Letter of September 2013, the Valuer Liability ruling of the HK High Court in 2009 – and the expectations which now fall upon valuers and surveyors as to the standards that should be met in their professional practice.


The UK Context


In anticipation of rising claims against valuers and surveyors, the role played by the Royal Institution of Chartered Surveyors (RICS) has been an active one in recent times. This culminated in the publication in January 2013 of its Guide to “Risk, Liability and Insurance in Valuation Work”. This is a most useful document which summarises legal risk, managing risk by contractual retainers, professional indemnity insurance, and practical risk management steps.


The Hong Kong Experience


HKIS Valuation Standards


The equivalent body to RICS in Hong Kong is The Hong Kong Institute of Surveyors (HKIS). It is similarly active in the local market and issued a very comprehensive guide to valuation practice in December 2012. The HKIS Valuation Standards (the HK Standards) were produced due to the “drastic changes…. in the capital market and the financial reporting standards in Hong Kong [which have led] to a greater demand for various types of valuation services on different types of property”.


The HK Standards are mandatory in nature and seek to ensure best practice is adopted by the industry.


HKEX – The Current System


The simplified system for property valuations in Hong Kong Initial Public Offerings (IPOs) took effect on 1 January 2012.


The simplification arose from the classification of listing applicants as holding interests for “property activities” or “non-property activities”. Disclosure and valuation requirements for the latter are relatively less onerous; and there is also a graduated scale according to the degree of interests in property held.


HKEX Guidance Letter Re Property Valuations


Despite the simplification of the level of disclosure required, the HKEX felt the need to issue its formal Guidance Letter in September 2013. The Guidance Letter is highly consistent with the HK Standards, although it naturally places greater emphasis on the adequacy of information provided to the market by issuers and their property valuation reports.


The Guidance Letter states: “Given that various assumptions adopted by a property valuer and an independent market consultant will affect the valuation of properties, the bases and justifications of these assumptions are material information for investors to make an informed assessment of the property interests …”. Similarly, for any cash flow/yield based valuations, “it is important that the valuation inputs and their justifications are clearly highlighted…”.


Without setting out an exhaustive list, this comprises or requires:


  • specification of discount rates if a discounted cash flow valuation is utilised;
  • for a comparison method of valuation, details of comparable properties, why they are selected, and how the actual valuation differs from comparable properties;
  • assumptions made should be benchmarked, with historical data;
  • material risk factors should be identified;
  • a sensitivity analysis should be included, where possible.


The Guidance Letter sets high standards. Valuers and surveyors should expect that they will be required to fully justify their professional views, and methodologies. The benchmark is clear – and high. The Hong Kong Courts have similarly endorsed the expectations of valuers in a High Court Ruling in 2009.


Hong Kong Case Law


The High Court assessed very similar issues in 2009 in a professional negligence claim against a valuer. The relevant property is in a basement of a building quite close to King’s Road, North Point. The valuer was found to have been negligent; and it is lack of transparency in the valuation and related report which were the core factors in that finding. This is precisely the issue of concern which led the HKEX to issue the Guidance Letter for property valuations in late 2013. In the Court, the valuer argued that the valuation and its report was reasonable and acceptable. The Court disagreed because:


  • the size of the property, and its useable or saleable area, were not clear/defined;
  • the comparables used were: not listed and clearly identifiable; and the comparables were potentially not directly comparable;
  • assumptions were made which were not specified;
  • there was no on-site inspection – actual due diligence and verification is a crucial aspect;
  • the “MTR effect” was misapplied and the estimated pedestrian flows were unreliable; including assumptions underlying this aspect.


The Year Of The Horse


The Horse is invariably positive and productive. We shall see what the property market holds for us in 2014; but it is beyond doubt that valuers need to ensure that their research, due diligence, and the drafting of their reports is very complete, transparent and justifiable. If the property market deteriorates, some valuation reports will come under close scrutiny; yet the expectations are clear and can be met by focusing on the key components identified in this note.


Clyde & Co


For further information, please contact:


Simon McConnell, Partner, Clyde & Co

[email protected]


Simon Konsta, Partner, Clyde & Co

[email protected]


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