AL-SALAM REIT ANNUAL REPORT 2017

146 AL-SALĀM REIT ANNUAL REPORT 2017 11. INVESTMENT PROPERTIES 2017 2016 RM RM At 1 January 922,090,000 911,460,000 Additions 316,850 - Fair value of gain on investment properties 5,063,150 10,630,000 At 31 December 927,470,000 922,090,000 Fair value measurement of the Fund’s investment properties The fair values of the Fund’s investment properties as at 31 December 2017 have been arrived at on the basis of valuation carried out by Messrs. Cheston International (KL) Sdn Bhd (“Cheston”), an independent valuer not related to the Fund. Messrs. Cheston 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 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 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, insurance, repairs and maintenance and management, 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 values of the investment properties are classified as Level 3 for fair value hierarchy disclosure purposes. The significant unobservable inputs applied by the independent valuer in applying the net income method above are the capitalisation rates of 6.5% to 7.3% (2016: 6.5% to 7.8%) based on reversionary yields on the Fund’s investment properties. The valuer had adopted market corroborated capitalisation rates, which is the most frequently adopted methodology by the property industry in Malaysia, based on information pertaining to recent comparable sales which are publicly available, adjusted for the location, quality and characteristics of the investment properties. A significant increase in the capitalisation rate used would result in a significant decrease in fair value, and vice versa. NOTES TO THE FINANCIAL STATEMENTS - CONT’D