SPECIAL FEATURE: A Practical Guide for PRC Property Valuation Under the Listing Rules

The valuation of property generally has a great impact on the financial statements of any company, and because of this, any applicant intending to list on the stock exchange may be required to include a valuation of their property investments in the listing document. A listing on the Hong Kong Stock Exchange requires applicants to comply with certain rules. We take a look at some of these rules and explain how they can be addressed in practice.

REQUIREMENTS UNDER THE LISTING RULES

In seeking a listing on The Stock Exchange of Hong Kong Limited (Exchange), the valuation of PRC properties may be required under the Rules Governing the Listing of Securities (Listing Rules). The requirement of valuing properties applies also to H share listings and is not restricted to initial public offerings. Further, it applies to Growth Enterprise Market (GEM) listings where the GEM Listing Rules on valuation of property follow closely those of the main board.

A listing applicant invariably seeks to include a valuation of its property investment in the listing document as this may have a substantial impact on the financial statements and the net tangible asset statement, especially when there is a revaluation surplus. Nevertheless, certain rules of the Exchange must be complied with before the listing applicant is entitled to ascribe any value to its property interests.

DOCUMENTS AND DEFINITIONS

Valuation of and information on interests in land or buildings are required to be included in a listing document (for example, a prospectus) by a new applicant, and certain acquisition or realization of property is required to be included in the circular issued to shareholders by a company (see Rules 5.01-5.04 of the Listing Rules and Section 38(1) of the Companies Ordinance (Cap. 32) and Paragraph 34(2) of the Third Schedule of the Companies Ordinance [Cap. 32]). The valuation report must be prepared by an independent qualified valuer and the effective date of valuation must not be more than three months before the date on which the listing document or circular is issued. Certain contents are required to be included in the valuation reports (see Rule 5.06(1)). Property is classified as property held for development, investment, owner occupation and sale. Different additional details are required depending on the stage of the development.

In addition, the Exchange has a discretion to require "such other information" to be included in a valuation report. This relates to Practice Note 12 made pursuant to the Listing Rules on Valuation of Property Situated in Developing Property Markets (Practice Note 12).

The most important statement in a valuation report is whether or not the relevant party has vested legal title to the property or a right to acquire a vested legal title and any material conditions affecting title. For PRC property valuations, the valuer must rely on a PRC legal opinion to establish the existence of vested legal title and summarize the material information regarding title and other relevant matters contained in the legal opinion.

A long-term land use right certificate is treated as the equivalent of vested legal title to the property, and the listing applicant should, with the benefit of a PRC legal opinion, confirm that the relevant party has obtained this certificate. If the issue of the long-term land use right certificate is pending, a properly approved land grant or transfer contract in writing, together with a PRC legal opinion, may be acceptable as evidence of a pending title. Nevertheless, it is the practice of the Exchange after the Clarification Announcement (to be discussed below) that the land grant or transfer contact is no longer sufficient, at least in respect of new listing applications.

Where the property is held or is being acquired for development, and where the residual method is used as the primary basis for valuation, the PRC legal opinion should contain all consents, permits and regulations required to be obtained and to what extent such consents have been obtained by the relevant party. Basically, the residual method is a less reliable method of valuation than comparable market transactions as mentioned in the Warning Statement of Practice Note 12.