Al-`Aqar Healthcare REIT Annual Report 2020

Financial Reports 135 10. Investment properties (cont’d) 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% - 8.00% (2019: 6.00% - 6.60%) - Higher term yield rates, lower fair value Reversionary yield ranging from 6.25% - 8.50% (2019: 6.25% - 9.50%) - Higher reversionary yield rates, lower fair value Void rate of 2.50% - 10.00% (2019: 2.50% - 10.00%) - Higher void rate, lower fair value Discount rate of 6.00% - 8.50% (2019: 6.00% - 9.50%) - Higher discount rate, lower fair value 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 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. Notes to the Financial Statements For the Year Ended 31 December 2020