Global Asset Management Property Valuation Policy Effective date: December 2011
Colonial First State Global Asset Management 2 Property Valuation Policy Purpose Valuations are undertaken on a regular basis in order to determine the fair market value of assets within financial statements and for striking unit prices of unlisted Funds. Valuations may also be undertaken for certain stakeholders, such as financiers, who may have special requirements which need to be considered when undertaking the valuation. This policy does not cover replacement costs valuations which may be required for insurance purposes. The policy formalises the procedures for desktop reviews and the external valuation of property assets. Objective The objective of this policy is to ensure that a consistent framework is applied to property valuations that allows all stakeholders to reference and have confidence in the consistency of the valuation process. Scope The valuation policy applies to all investment properties and property, plant and equipment, managed by the Colonial First State Global Asset Management Property businesses (hereafter GAM or CFSGAM Property). This includes unlisted retail and wholesale funds, property mandates and listed funds. Authority This policy applies to Funds and Trusts issued by Commonwealth Managed Investments Limited (CMIL), and Funds and Trusts managed by CMIL on behalf of others. 1 This policy has been formally approved for use by the Commonwealth Managed Investments Limited (CMIL) board on 19 December 2011. Authority to vary the valuer term of appointment is subject to that variation being formally approved by the CMIL Board prior to notifying the valuer of the term being varied. 1 Subject to Fund-specific requirements specified in the relevant Constitution/ Information Memorandum
Colonial First State Global Asset Management 3 Policy Overriding obligation The overriding principle in the valuation of assets is for all personnel to report accurately in a diligent and impartial manner, whilst always acting honestly and in the best interests of each fund and its investors. Inconsistency of policy with fund documentation Where inconsistencies and conflicting requirements exist, the fund s constitution, trust deed or management agreement will take precedence over this Policy to the extent of the inconsistency. Personnel policy Senior management is responsible for the overall direction of competency for staff and the adequacy of resources, which is to be reviewed regularly to ensure accurate, efficient and effective valuations. Fund managers are to nominate a person who is appropriately experienced to manage the valuation process for each property ( nominated person ). In the case of assets which are jointly owned by GAM related parties, a nominated person may represent each owner, or alternatively one nominated person may be jointly appointed by agreement by each fund manager. The nominated person must have an appropriate level of understanding of the valuation process which, as a minimum, means practical experience as well as tertiary studies that include the valuation of property. The fund manager may also deem an individual to be qualified by experience if they have appropriate technical skills and level of exposure to valuation held in previous roles. The nominated person is fully accountable for the valuation process and must ensure that appropriate delegations are in place when they are not available. This includes undertaking desktop reviews, the instruction of external valuers and the timely receipt of both draft and final valuations. The fund manager remains ultimately responsible for authorising or approving valuations. If the fund manager for the respective fund is unavailable their responsibilities are delegated to their line manager. Governance and risk management framework The valuation policy is governed within the Compliance and Risk Management Framework of GAM including but not limited to, statutory compliance plans and the defined internal controls program. This policy must be reviewed at least annually by the Valuation Committee to take into account any regulatory changes, changes in market conditions, additional underlying fund types and any other requirements that would need to be accounted for in the valuation process.
Colonial First State Global Asset Management 4 Timing of valuations Investment properties Investment properties are typically assets which are held over the long term primarily for the purpose of deriving income. These assets are valued at regular intervals as detailed in Schedule 1. Investment properties may be categorised as one of two types, and for which different rules apply, being: Non-development property: an asset that is not development property, and therefore considered fully operational, Development property: an asset that is substantially under development, including in certain instances refurbishment works, and therefore considered not fully operational. Whilst the Fund Manager retains discretion as to what constitutes substantially under development, the asset may only be considered to be development property where more than 10% of lettable area is under development/refurbishment Where the Fund Manager exercises the discretion to deem an asset development property, the reasons must be disclosed in the next fund report to the CMIL board. Inventory Property inventory will usually consist of assets that are being developed for sale rather than for deriving rent. These assets are carried at the lower of cost and net realisable value in the financial statements. A valuation may be required from time to time to ensure that these assets are not carried above net realisable value (ie impairment testing). Otherwise there is no requirement to value these assets for financial statement or unit pricing purposes. There may be other reasons to undertake a valuation of inventory, such as financier requirements or unit pricing, which will determine the timing and nature of the valuation. Where the net realisable value of inventory is lower than the cost, the inventory is valued at fair value less costs to sell for the purpose of the valuation policy. Jointly owned assets GAM entity(ies) and external party(ies) The GAM entity(ies) undertake(s) valuations independent of the external party(ies). A joint valuation may be undertaken for cost sharing purposes as long as this independence is maintained. GAM entity and related bodies corporate Where a GAM entity and a related body corporate (either another GAM entity or another part of the Commonwealth Bank of Australia group) jointly own an asset, it is usual practice, but not a requirement, that the valuation is undertaken jointly, as agreed between the respective parties. Other valuations Valuations may also be undertaken at other times where a requirement exists such as on the acquisition or disposal of an asset. These requirements will dictate the timing and nature of the valuation.
Colonial First State Global Asset Management 5 In circumstances where a related party transaction is to occur, the specific rules pertaining to valuation of the asset are set out in Standing Order 5: Related Party Transactions. Context The external valuation procedures incorporate the detailed process, timetable and responsible parties involved in valuing each Funds investment properties this includes compiling the valuation cycle, selection and tendering for a valuer, issuing letters of instruction and the review and approval of valuation reports. The broader policy requires that all Funds obtain an independent valuation on each investment property at least once per financial year. In practice, but only as a general guide, this means that approximately 25% of each Fund portfolio is externally valued each quarter. In financial terms, the statutory financial accounts adopt value as being the carrying value of the properties must reflect their fair value. In effect, but only as a general guide, at each financial year end, on average, 50% of the investment properties values will be aged six months. In order to address the potential risk that carrying value may not reflect fair value due to the ageing of the valuation cycle, GAM has adopted a desktop review process to determine whether a material change in value may have occurred since the last external valuation was undertaken. Desktop Reviews Desktop Reviews are not taken up in the financial statements, rather they are utilised to trigger a new external valuation, to be completed in circumstances where there is a value movement that is: than ±10% on an individual asset and/or than ±5% on Net Tangible Assets (NTA) of the fund. If the internal valuation results in a movement of greater than 5% but less than 10% of an individual asset and less than 5% of the NTA of the fund, the fund manager, in consultation with the portfolio manager, will determine whether or not to undertake an external valuation. Reasons for this decision must be documented and included in the next Fund report to the Board. Generally, no external valuation will be required when the movement is less than 10% of an asset and less than 5% of a fund s NTA. The exception to this general principle will only be activated in periods of unusually volatile market circumstances 2, where significant change to either the whole or a specific segment of the property market is experiencing rapid change to underlying value. 2 Unusually volatile market conditions may include, for example, a scenario such as the Global Financial Crisis of 2008 it is not intended to be used for cyclical changes (which are predictable). The variation is intended solely to enable sufficient flexibility to respond to extreme events, and not as a proxy for more frequent valuation cycles which is a matter for Policy amendment.
Colonial First State Global Asset Management 6 For clarity the Desktop Review number will not be taken up in the financial statements. However where an external valuation has been triggered the resulting external valuation will be taken up in the financial statements. The nominated person must ensure that Desktop Reviews are undertaken within sufficient time to allow for external valuations to be obtained (typically for the quarter end) should one be triggered. In practice this means that the internal valuation will be undertaken approximately 2 months prior to the valuation date. Inputs to Desktop Reviews The nominated person must maintain evidence to support the assumptions used when undertaking an internal valuation. Input may be sought from external valuers when arriving at the assumptions. In addition for retail asset valuations, Colonial First State Property Management may be required to provide input into the valuation process as determined appropriate by the fund manager. Typically, this will include income/market rent elements only. Input assumptions for the desktop valuation process include: 1. Market Rent assumptions are provided from either the portfolio manager or the independent valuer. Capitalisation rate, discount rate, market rental growth assumptions and terminal cap rate is typically sourced from the independent valuer. 2. Other assumptions factors that may be specifically relevant to the asset or the property segment an asset is held in: usage of such assumptions must be recorded as part of the desktop valuation and are subject to signoff by the portfolio manager and fund manager. Portfolio managers will review the inputs such as capitalisation rate, discount rate, market rental growth, and any other relevant factors for each property and the review will be supported by evidence as to why the assumptions are appropriate. Valuation modelling For commercial and industrial property, Desktop Review s are performed using a discounted cash-flow model including a cap-rate assessment provided by a third party vendor (DYNA). For retail property, Desktop Review s are performed using a purpose-built cap-rate model. All modelling is subject to the Group Models Policy, and where provided by an external vendor, the Group Outsourcing and IT Security Policies.
Colonial First State Global Asset Management 7 External valuations Approval to appoint valuers The nominated person is required to identify a suitable valuer and make a recommendation to the fund manager(s) for approval of the appointment of the valuer. The appointed valuer must be a Certified Practicing Valuer registered with the Australian Property Institute or equivalent body, they must be licensed and qualified to value the asset with a current track record of valuing similar types of assets in the geographic region within which the valuation is being performed. Valuers selected must be from recognised firms with, amongst other things, appropriate insurance arrangements in place. The fund manager may approve the appointment of a valuer not on the panel from time to time. Reasons for any such appointment must be documented. The nominated person must ensure that the selected valuer does not have any conflict of interest which would preclude them from undertaking the valuation. Rotation of valuers 1. Non-development properties term of appointment Each valuation firm and valuer is limited to undertaking valuations of a property for a maximum of a two year period, unless exceptional circumstances 3 apply. Where exceptional circumstances may arise, the fund manager, in consultation with the portfolio manager, must seek authorisation to extend the term of the valuer appointment from the Valuation Committee (endorsement) and from the appointed Manager 4, however CMIL retains the right of formal approval of that extension unless it delegates, in writing, that approval power to the appointed Manager. Once the appointment cycle has ended the valuer, and valuation firm, is then excluded from valuing the asset for a period of not less than two years. 2. Development properties term of appointment Where a property is under development the valuer appointment may be for a period not to exceed three years, unless a variation to the term of appointment has been approved by CMIL. The fund manager is required to seek endorsement from the Manager and formal approval from CMIL for any such extension of the term of appointment prior to the end of the appointment cycle typically, this approval will be as a result of the development works requiring additional time to completion. 3 Exceptional circumstances may include: when a property is due to be marketed for sale within what would be the next 6 month valuation cycle; significant % of tenancy renewal is due in the next valuation cycle. 4 CMIL has reserved approval powers for extension of a valuer appointment to itself. Any variation to that approval process must be by way of written delegation from CMIL to the appointed Manager.
Colonial First State Global Asset Management 8 Valuation instructions Quotation for valuations The nominated person is required to seek a written quotation from the valuer(s) for each asset to be valued. Letter of appointment A Letter of Appointment is issued by the nominated person to the valuer. The letter is signed by the nominated person. The letter must contain the purpose of valuation and where appropriate must state that the owner(s) and financier (or other party) can rely on it. Information provided to valuer The nominated person is responsible for gathering and dispersing information required by the valuer. All correspondence is to be provided on a confidential basis. Where the managing agent provides the valuer with information the nominated person is to be provided a copy. Acceptance and review of valuations The nominated person is responsible for the timely receipt of the valuation report. All reports need to be obtained in draft format and submitted for review and approval as detailed in Schedule 2. Once finalised the valuation is to be signed off by the nominated person as well as the fund manager. A Valuation Approval Form containing a summary of the valuation results and assumptions, and a comparison to the previous period, is available and can be used by all funds. An external valuation will be accepted and reflected in the financial accounts if it is considered reasonable and reflective of the market. However, if there is a flaw in the valuation logic or evidence, the valuation may be disputed and not adopted. The fund manager of each fund has the responsibility and the discretion to accept a valuation as a representation of the market, therefore the valuation policy does not obligate the fund to take all valuations to book. Where a valuation is not taken to book reasons must be documented in such detail as to be reasonably relied upon.
Colonial First State Global Asset Management 9 Valuation Committee The Valuation Policy is governed by the Valuation Committee which reports to the Board of Directors of CMIL. Charter of the Valuation Committee To be the custodians of the valuation policy and ensure that reviews of the Valuation Policy take place on a periodic basis, and not less than annually. To review and endorse the Valuation Brief provided to external valuers at least annually. Review the panel of valuers at least annually, including each valuer having met the terms of appointment as set out in the Letter of Appointment. Issue the Valuation Brief to the panel of approved valuers when changes are made. Ensure that each firm included on the panel of valuers has supplied evidence of the appropriate level of professional indemnity insurance as determined by the Valuation Committee on an annual basis. Ensure that each firm included on the panel of valuers has maintained its accreditation status and its valuers continue to be Certified Practicing Valuers (or equivalent). To review, and if thought appropriate, endorse recommendation for the extension of valuer appointment periods as outlined in this Policy. Members of the Valuation Committee The members of the Valuation Committee are: Unlisted ( Wholesale ) Property Funds nominee Listed Property Funds nominee Asset Management nominees, at least one each from commercial and retail Financial Controller or delegate Head of RMC or delegate, who will be the Chair of the Committee Head of Operations, CFSGAM Property
Colonial First State Global Asset Management 10 Schedule 1 Timing of valuations Unlisted funds Background Unlisted funds include all funds or direct property mandates, (retail or wholesale) which are not listed on a stock exchange. Valuations for unlisted funds are used for unit pricing to determine a unitholder/owner entitlement. Interests in these assets are not market traded and as a result valuations are often undertaken more frequently than those for assets held in listed funds. Valuations are also used for the purposes of determining fund performance (and any relevant performance fees that may be applicable), and to assist in fund capital management programs (part of the due diligence undertaken by financiers). Timing of valuations External valuations are undertaken twice per year for each asset within an unlisted fund. Desktop Reviews are undertaken on the alternating quarter that an external valuation is not undertaken or more frequently if market conditions warrant. Desktop Reviews may trigger an external valuation (see Internal Valuations). Listed funds Background Listed funds include all funds that are listed on a recognised stock exchange. Timing of valuations External valuations are undertaken at least once every financial year for each asset within a listed fund. If an external valuation is not undertaken during the six months prior to the reporting date, a Desktop Review is undertaken as at that date or more frequently if market conditions warrant. Desktop Reviews may trigger an external valuation (see Desktop Reviews ). Jointly owned assets by GAM and related bodies corporate The timing of valuations for assets which are owned jointly by GAM and a related body corporate will be dictated by the agreed approach between the parties.
Colonial First State Global Asset Management 11 Schedule 2 Valuation approval process Unlisted funds 1. The nominated person provides a copy of the draft valuation and a copy of key information to the fund manager for review and approval. 2. The fund manager provides a copy of the draft valuation along with the key information to the head of unlisted property for approval. 3. The head of unlisted property or their delegate provides a summary of the draft valuation along with key information to the Head of Property (or equivalent) for approval. Listed funds 1. The nominated person provides a copy of the draft valuation and a copy of key information to the fund manager for review and approval. 2. The fund manager provides a summary of the draft valuation along with the key information to the Head of Property (or equivalent) for approval.