Query:
A firm ABC consulting has just been appointed to do a real estate property valuation
engagement that is required for the purpose of bank’s annual valuation requirement. This is
a 12 story residential apartment in Bahrain and land and building is owned by the company
and is leased out fully to residential tenants. This is your first engagement of such valuation
. Advise ABC in detail governing how to do this valuation, what are the requirements per
local Real estate authority in valuing such properties, what are international valuation rule
requirements, what all documents needed to do this valuation, xl modelling and what
valuation approach etc ?
Answer:
Real Estate Property Valuation for Bank’s Annual Requirement in
Bahrain
1. Introduction
This advisory addresses the valuation requirements for a 12-story residential apartment
building in Bahrain, owned by a company and fully leased to residential tenants, for the
purpose of a bank’s annual valuation requirement. The valuation process must comply with
both local Bahraini regulations and international valuation standards.
2. Relevant Standard/Law References
2.1 Bahrain Real Estate Regulatory Authority (RERA) Requirements
a. Licensing and Qualifications:
º Valuers must be licensed by RERA to conduct real estate valuations in Bahrain
Resolution_No_(2)_of_2019_on_Licensing_of_Real_Estate_Valuers(ENG) (1), Article
3, page 3.
º Different license categories (A, B, C, D) exist, with specific requirements for each
Resolution_No_(2)_of_2019_on_Licensing_of_Real_Estate_Valuers(ENG) (1), Article
4, page 3-4,
Resolution_No_(2)_of_2019_on_Licensing_of_Real_Estate_Valuers(ENG) (1), Article
4, page 4.
b. Valuation Standards:
º Valuers must comply with the Bahrain Valuation Standards (BVS)
Circular-Sent-On25092022(BVS) (1), page 2.
º BVS is based on international standards and best practices, prepared in
collaboration with the International Valuation Standards Council (IVSC) and the Royal
Institute of Chartered Surveyors (RICS) Circular-Sent-On25092022(BVS) (1), page 2.
c. Valuation Methods:
º Approved methods include cash flows, sales comparison, cost approach, income
method, and investment-based approach
Resolution_No_(2)_of_2019_on_Licensing_of_Real_Estate_Valuers(ENG), Article
26, page 12.
2.2 International Valuation Standards (IVS)
a. IVS Framework:
º Provides overarching principles for valuation David Parker – International Valuation
Standards_ A Guide to the Valuation of Real Property Assets-Wiley-Blackwell (2016),
page 28.
b. IVS Asset Standards:
º IVS 230 Real Property Interests and IVS 300 Valuations for Financial Reporting are
particularly relevant David Parker – International Valuation Standards_ A Guide to the
Valuation of Real Property Assets-Wiley-Blackwell (2016), page 39.
c. Valuation Approaches:
º Three principal approaches: market approach, income approach, and cost approach
David Parker – International Valuation Standards_ A Guide to the Valuation of Real
Property Assets-Wiley-Blackwell (2016), page 135.
3. Detailed Explanations
3.1 Valuation Process
a. Engagement and Scope:
º Obtain a written agreement with the client stating terms and conditions
Resolution_No_(2)_of_2019_on_Licensing_of_Real_Estate_Valuers(ENG), Article
25, page 12.
º Verify that the valuation requester is the property owner or authorized representative
Resolution_No_(2)_of_2019_on_Licensing_of_Real_Estate_Valuers(ENG), Article
25, page 12.
b. Data Collection:
º Gather all relevant property documents and details
Resolution_No_(2)_of_2019_on_Licensing_of_Real_Estate_Valuers(ENG), Article
25, page 12.
º Collect information on comparable properties, market rents, and capitalization rates.
c. Property Inspection:
º Conduct a thorough inspection of the property to assess its condition, features, and
location.
d. Valuation Analysis:
º Apply appropriate valuation methods as per BVS and IVS guidelines.
º For income-producing properties like this apartment building, the income approach
(specifically the income capitalization method) is likely to be most appropriate.
e. Report Preparation:
º Prepare a comprehensive valuation report adhering to BVS and IVS standards.
3.2 Valuation Methods
For this 12-story residential apartment building, the following methods should be
considered:
a. Income Capitalization Approach:
º Most relevant for income-producing properties.
º Capitalize the property’s net operating income using an appropriate capitalization
rate.
º Consider current lease agreements, market rents, occupancy rates, and operating
expenses.
b. Sales Comparison Approach:
º Compare the subject property with recent sales of similar properties in Bahrain.
º Make adjustments for differences in location, size, condition, and other relevant
factors.
c. Cost Approach:
º Estimate the cost to replace the building, considering depreciation.
º Add the estimated land value.
º This method may be less relevant for an existing, fully-leased property but can
provide a useful cross-check.
3.3 Required Documents
a. Property-specific documents:
º Title deed and land registration documents
º Building plans and permits
º Current lease agreements for all units
º Rent roll detailing current tenants, lease terms, and rental rates
º Operating expense statements for the past 2-3 years
º Maintenance records and capital expenditure history
b. Market data:
º Comparable sales data for similar properties in Bahrain
º Market rent data for similar residential units
º Current capitalization rates for similar properties
c. Valuation-specific documents:
º Engagement letter with the client (bank)
º Valuer’s RERA license and qualifications
º Property inspection notes and photographs
3.4 Excel Modeling
Develop an Excel model that includes:
a. Income analysis:
º Detailed rent roll
º Projection of potential gross income
º Vacancy and collection loss estimates
º Operating expense analysis and projections
º Net operating income calculation
b. Valuation calculations:
º Income capitalization worksheet
º Sales comparison analysis
º Cost approach calculation (if used)
c. Sensitivity analysis:
º Impact of changes in key variables (e.g., cap rate, vacancy rate, rental growth)
d. Supporting schedules:
º Comparable sales data
º Market rent analysis
º Capitalization rate derivation
3.5 Valuation Approach
Given the nature of the property (a fully-leased residential apartment building), the primary
valuation approach should be the Income Capitalization Method:
a. Estimate the property’s net operating income (NOI):
º Gross potential income (based on current leases and market rents)
º Less vacancy and collection loss
º Less operating expenses
b. Determine the appropriate capitalization rate:
º Analyze comparable sales and market data
º Consider property-specific risk factors
c. Calculate the property value: Value = Net Operating Income / Capitalization Rate
d. Cross-check the results using the Sales Comparison Approach:
º Analyze recent sales of similar apartment buildings in Bahrain
º Make appropriate adjustments for differences in property characteristics
e. Consider using the Cost Approach as a secondary method to support the findings.
4. Used Cases/Interpretations & Disclosures by the listed entities
While specific Bahraini examples are not available in the provided knowledge base, we can
draw insights from international practices:
British Land Company PLC (UK, 2023): The company engaged external valuers (CBRE,
Jones Lang LaSalle, Cushman & Wakefield, and Knight Frank) for property valuation. The
valuation process involved:
º Assessing property-specific information such as tenancy agreements and rental
income.
º Applying assumptions for yields and estimated market rent, influenced by prevailing
market yields and comparable market transactions.
º For developments, using the residual appraisal method, estimating the fair value of
the completed project using a capitalisation method less estimated costs to
completion and a risk premium.
SEGRO plc (UK, 2023): The company’s valuation process included:
º Engagement of CBRE as external valuers.
º Valuers performing work in accordance with RICS Valuation – Global Standards
2022.
º Consideration of property-specific information, current tenancy agreements, rental
income, property condition, location, and future rental prospects.
º Use of prevailing market yields and market transactions to inform assumptions.
º For development properties, consideration of projected costs to complete, time until
practical completion, and letting prospects.
These cases highlight the importance of engaging qualified external valuers, adhering to
recognized standards (such as RICS), and considering property-specific factors along with
broader market conditions in the valuation process.
5. Summary
To conduct a real estate property valuation for a 12-story residential apartment building in
Bahrain for a bank’s annual valuation requirement:
1. Ensure compliance with RERA regulations and licensing requirements.
2. Adhere to Bahrain Valuation Standards (BVS) and International Valuation Standards
(IVS).
3. Collect comprehensive property-specific and market data.
4. Primarily use the Income Capitalization Approach, supported by Sales Comparison
and potentially Cost Approaches.
5. Develop a detailed Excel model for analysis and calculations.
6. Prepare a comprehensive valuation report that meets both local and international
standards.
7. Consider engaging external valuers with appropriate qualifications and experience in
the Bahraini market.
8. Ensure transparency in the valuation process and disclose all significant assumptions
and methodologies used.
By following these guidelines and leveraging international best practices, ABC Consulting
can deliver a robust and credible valuation that meets the bank’s requirements and
adheres to both local Bahraini regulations and international valuation standards.
6. Attribution
The information provided in this response is based on Resolution No. 2 of 2019 on
Licensing of Real Estate Valuers as issued by the Real Estate Regulatory Authority of
Bahrain, and International Valuation Standards as issued by the International Valuation
Standards Council. For complete and authoritative guidance, please refer to the full
Resolution No. 2 of 2019 available through the Real Estate Regulatory Authority of Bahrain
website and the International Valuation Standards available through the International
Valuation Guidance for Real Estate Apartment
