Applied Valuation in Hong Kong and Asia Capital Markets 1st Edition

Valuation is perhaps the least known among the established profession and academic discipline. While valuation is involved in every facet of the capital markets and real estate markets, most other practitioners and the general public might have difficulty describing what valuers are responsible for other than “to come with a valuer for an asset” and it is even more rare that any of them could describe why and through what means valuers come up with such values.

In everyday life, whenever a person would like to acquire or dispose of some assets, he or she usually have some idea about how much the asset is worth and so he or she will have some expectation on the price he or she is ready to accept (in a sale) or to pay (in a purchase). If no other people in the market share a similar view with him or her, the deal will fail, i.e. he or she could not have the asset sold or purchased, and he or she will either have to revise his or her view on the value as opined by other market participants, or to give up the deal altogether. It does not appear that a “professional opinion of the value” (whatever it means) is required.

The raison d'être of valuation is that it is required for any developed capital markets to function. Valuation, in its essence, aims to provide objective opinion on a well-defined asset at a definite date. Such opinion is important for a wide variety of functions of the society. For example, when a business or property owner is seeking business loans or mortgages respectively, the banker must have a good idea on the values of the assets such as the business or the real estate. Further, when a company, public or private, decides to issue to shares, the shareholders should have an independent opinion on the values of such new issues in order to set the price thereon. The values of these assets are often challenging to arrive at for a variety of reasons. For example, well-functioned market for the asset might not exist, the future benefit of the asset is difficult to forecast, or that the bundle of rights and liability associated with the asset is complicated. Valuation, as a practical and academic discipline, exists for providing sound opinions on real and intangible or financial assets, including of course those that are highly challenging to deal with.

More challenging the valuations, more innovations and creativities are required from the valuers. It is often said that valuation is both a science and an art—a science because it is, or ought to be, based on sound principles from economics and finance, among others; and an art because, throughout the valuation process, from preliminary research through choosing appropriate valuation approaches to deciding on applicable parameters, inevitably subjective judgments from the valuers are involved that depends on his or her intuition and experience.

Such is the nature of valuation. One consequence is that the basic machineries of valuations are easy enough to be readily used by an average undergraduate to tackle the simplest kind of problems, giving the students a compliancy that valuation will, or supposed to, give definite answers via a set of formulae; and yet, should they choose to embark their career as a valuer, they will come to their horror that not nearly nothing is definite for a realistic valuation assignment, as every single choice made during the valuation process requires some justification. As a competent valuer, we are not merely responsible for producing the valuation, but also be ready to explain and defend it upon inquiry from an external professional (such as an auditor) or a client without any technical expertise.

As our capital and real estate markets becomes ever more complex and innovative, aided by Fintech and Proptech, to name a few, valuers must be ready to tackle new and novel valuations, and this cannot be done without sound understanding of the underpinning theories. At the same time, because valuation is an applied discipline, it must be done in view of the applicable valuation codes and financial reporting standards, for example. We endeavor to present to the readers both the theoretical and practical sides and the intricacies involved.