Al-`Aqar Healthcare REIT Annual Report 2018

NOTES TO THE FINANCIAL STATEMENTS 11. INVESTMENT PROPERTIES The Group The Fund 2018 2017 2018 2017 RM RM RM RM At 1 January 1,459,703,200 1,424,360,000 1,320,100,000 1,281,800,000 Addition - 13,259,000 - 13,259,000 Enhancements 2,858,080 506,160 2,858,080 506,160 Gain on fair value of investment properties 30,341,920 24,791,923 30,341,920 24,534,840 Effect of foreign currency exchange differences (7,176,400) (3,213,883) - - At 31 December 1,485,726,800 1,459,703,200 1,353,300,000 1,320,100,000 Land and buildings at fair value 1,485,726,800 1,459,703,200 1,353,300,000 1,320,100,000 Fair value measurement of the Fund’s investment properties The fair values of the Group’s and of the Fund’s investment properties have been arrived at on the basis of a valuation carried out by Messrs. Cheston International (KL) Sdn Bhd (“Cheston”), Messrs. Knight Frank Malaysia Sdn Bhd (“Knight Frank”), and Messrs. Henry Butcher Malaysia Sdn Bhd (“Henry Butcher”), independent valuers not related to the Group and the Fund. Messrs. Cheston, Messrs. Knight Frank and Messrs. Henry Butcher are registered members of the Board of Valuers, Appraisers and Estate Agents, Malaysia, and they have appropriate qualifications and recent experience in the valuation of the properties in the relevant locations. The valuation of the Group’s and of the Fund’s investment properties were performed in accordance with the Malaysian Valuation Standards issued by the Board of Valuers, Appraisers and Estate Agents, Malaysia. The fair values were determined based on the capitalisation of net income method (“investment method”) and is premised on the principle that the value of an income-producing property is represented by the “present worth of future rights to income, or utility”. The values estimated under this method are derived by ascertaining the market rent of the properties; deducting all reasonable annual operating expenses (as would be experienced under typical management) and then capitalising the resultant net operating income by an appropriate rate of capitalisation to obtain the present value of the income stream. In undertaking their assessment of the value using this approach, the market rental income and expected future rental income are taken into consideration. In arriving at the net income, the outgoings i.e. quit rent, assessment, takaful coverage and repairs and maintenance, are deducted from gross rental income together with allowance for void. In estimating the fair values of the investment properties, the highest and best use of the investment properties is their current use. The fair value of the investment properties are classified as Level 3 for fair value hierarchy disclosure purposes. The significant unobservable inputs applied by the independent valuers in applying the investment method above are as follows: Significant unobservable inputs Inter-relationship between significant unobservable inputs and fair value measurement Term yield ranging from 6.00% - - Higher term yield rates, lower fair value 8.25% (2017: 6.00% - 8.25%) Reversionary yield ranging from 6.25% - - Higher reversionary yield rates, lower fair value 8.50% (2017: 6.25% - 8.50%) Allowance for void of 2.50% - - Higher allowance for void rate, lower fair value 7.50% (2017: 3.00% - 7.50%) The valuers had adopted market corroborated capitalisation rates, which is the most frequently adopted methodology by the property industry in Malaysia and in Australia, based on information pertaining to recent comparable sales which are publicly available, adjusted for the location, quality and characteristics of the investment properties. Al-`Aqar Healthcare REIT • Annual Report 2018 128 FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2018 (CONTINUED)