Why common areas and financial health should matter in a valuation
When a bank orders a valuation of a condominium unit for financing purposes, the inspection often focuses heavily on the unit itself (its condition, size, view, layout, age, finishes) and on comparable recent transactions in the same development. But in a strata title condominium development, the value of your unit is inextricably tied to the common areas, the financial health of the development, and how well the development is governed and maintained.
Here is why they matter and how an informed buyer or seller can dig deeper.
1. The “shared fabric” of the development affects buyer sentiment and demand
The condition of common areas (lobbies, corridors, lifts, garden, pool, gym, parking, external facade) is a visible indicator of how well the development is managed, and a cue to buyers about neglect, future costs and hidden liabilities. If a development shows signs of deterioration, such as peeling paint, cracked tiling, broken lighting, spalling concrete, malfunctioning lifts, water leaks in corridors, that reduces buyer confidence, lowers perceived prestige, and narrows the prospective buyer pool. A building with clean, well-kept, modern common areas will command more interest and better offers.
One resource on high‑rise maintenance notes that underfunded or reactive maintenance leads to visible wear, poorer aesthetics, higher special levies, and ultimately lower values (Ref 1).
So, while comparable transactions in the same building may implicitly factor in common area conditions up to a certain point, that assumes that no major changes have occurred since those sales. Recorded transactions at the land office lag several months to allow time for transactions to complete and to process the information before they are published.
If a large defect (e.g., plumbing leak, façade damage, structural issue) or deferred maintenance problem has recently emerged, the standard comparable sales method may not reflect that negative shift due to the time lag.
2. Sinking funds, maintenance accounts and cash flow risks
Every strata development must maintain a maintenance fund (for recurring cleaning, security, utilities, minor repairs) and a sinking fund account (for capital expenditure, refurbishments, structural works, replacement of lifts, repainting, etc.). In Malaysia, under the Strata Management Act 2013, these accounts are legally required and are restricted to permitted usages (Ref 2).
If the sinking and maintenance funds are not healthy, the development may not have enough money for future repairs. Owners may face large extra payments to cover repair costs. Worse, major works may be deferred, leading to deterioration in the building’s condition, safety, aesthetic quality, and desirability.
In practice, many unit buyers are unaware of the state of these funds, or their history. A development with weak funds or repeated financial stress is a red flag. Indeed, some building-management articles caution that badly run strata schemes with delinquent contributions lead to breakdown, neglected common property, and value erosion (Ref 3).
If the management body is already in financial trouble, that introduces risk. Vendors might be poorly paid, services might suffer, common areas might deteriorate, and the maintenance charge might increase.
3. Governance, transparency and latent liabilities
It is prudent to note any obvious red flags as conditions that might influence value or warrant further investigation.
A buyer or lender would benefit from knowing whether there are major or emergent issues at the common property and financial health level.
A unit’s price is not entirely independent — it rides on the health, appearance, funding, and governance of the shared parts of the development.
A valuation report could include the following:
a. A brief section of known defects or risks at the building or common property level. For example: noticeable exterior paint blistering, water seepage at the basement parking area, pending lift overhaul due in 2 years, or deferred maintenance indicated by the AGM or monthly minutes.
b. Flag any known financial or governance concern, such as if meeting minutes show repeated increases of service charges, special levies, or deficits in the funds.
Note: An article by CBRE on “What goes into a residential valuation report?” states the following: “there are a few common forms of ownership: Freehold Fee Simple, Cross Lease and Unit Title. If it’s a Unit Title, the ownership will require detail on Body Corporate rules, levies and review of the minutes from Annual Meetings. Whereas a Cross Lease tenure will include a review of Flats plan and lease document. These additional documents may incur additional costs (Ref 4).
c. Note any uncertainties or qualifications, for example, “No reliable public data was available for the maintenance and sinking fund balance. Inquiries to the management corporation are recommended.”
d. Advise further due diligence that prospective buyers or lenders request or review the meeting minutes, financial statements, or building condition reports.
Even if the valuation methodology remains largely based on comparable sales, such commentary would add valuable context to see whether there is reason to adjust the market value.
4. What buyers can do to check the minutes, AGM records, etc.
Before purchasing a property, a prospect should proactively check:
a. Minutes of Management Corporation / Joint Management Body meetings
Under strata management legislation, the minutes of AGM (annual general meeting) or EGM, and monthly management meetings should be posted on a notice board outside the management office. The agenda for AGM should include audited accounts, financial statements, budget proposals, and reported issues (Ref 5). If the AGM minutes have been taken down, you may request a copy from the owner.
The monthly management minutes may not always disclose the exact quantum in the maintenance account or sinking fund. Still, they would indicate whether there is a shortfall, proposals to increase service charges, or major works needed. If repeated debates arise over repair works, funding issues or delinquent owners, that is a red flag.
b. Review financial statements and audit reports
The audited accounts should include a breakdown of funds, income and liabilities. Inspect whether the sinking fund consistently grows or is being drawn down rapidly. If there is a trend of deficit, or if capital expenditure is being deferred, that signals risk.
c. Walk the common areas physically
Don’t just rely on the unit inspection. Walk through lobbies, corridors, lifts, parking, and landscape areas. Check for signs of neglect. Speak with residents and ask if there have been many complaints.
d. Ask the management directly
Request, in writing, any known major works slated, future capital expenditure plans, and financial shortfalls. If the management refuses, you can ask the owner to get the information.
5. Compare with similar developments
See how similar-age condominiums nearby are faring in terms of condition, service charges, and resale prices. If your development is noticeably worse or requires more immediate work, you may want to reconsider the purchase.
When buying a property, one must factor in the common property condition, deferred maintenance liabilities, and the fiscal health of funds. Even though comparable sales provide a stable baseline, they may lag behind recent adverse developments. As a seller, you may benefit if you proactively gather for buyers or lenders the minutes, financial reports, and assurances of upkeep. As a buyer, insist on clarity, walk the common areas, and review meeting minutes. These are not trivial matters as they can materially affect value, risk, and your peace of mind.
References:
1.PEPS Ventures Learning Resources)
2.MyLawyer
3.HBA
4.What goes into a residential valuation report? | CBRE Malaysia
Photo by Kaur Kristjan on Unsplash
