How should real estate be valued in challenging times?
Written by Roger Clarke, Managing Director and Head of Capital Markets, IPSX
It’s a question that always arises during market volatility and has resurfaced over the last 12 months for the first time since UK values fell 44% over six months in late 2008 and early 2009. Sharp falls in the value of retail property have triggered the debate this time round, with yawning gaps between the net asset values of some of the UK’s biggest REITs and the price those companies trade at on the stock market. This has prompted a further debate over how UK real estate companies are valued, with most listed companies valued according to a multiple of earnings, and only property companies according to a valuation by a surveyor according to rules set by the RICS Red Book.
Below, Roger Clarke, Managing Director and Head of Capital Markets at IPSX, examines some of the wide challenges facing UK property valuation before outlining how the system can be simplified through a new transparent way to invest in individual properties rather than property companies which will benefit owners and investors alike.
Why do some listed property companies trade at large premiums
and others trade at wide discounts to their supposed net asset value?
One reason is the management team, which can add to or substantially detract from the value of a property company, depending on their reputation and performance. The other is that businesses now judged as `operational’, often in the student accommodation, self-storage or healthcare worlds that are judged to be less vulnerable to economic shocks, are now being valued just as much on the reliability of their income as the value of the assets they own. Valuation of the fast-growing build-to-rent asset class is also moving in this direction - away from the traditional vacant possession value – to reflect the quality of the income stream but also the standard of management as is the case in US multi-family real estate.
In this era of data and transparency shouldn’t we be going further with real estate valuation? Do investors have access to enough information?
It can be argued that investors should have access to the valuation reports detailing the detailed workings behind their calculations, explaining the quality of the tenants’ income, including break clauses or anything else which might be a cause for concern. Full details of future cash flows would allow investors to work out for themselves the rate of returns they can expect from their investment, rather than just relying on one firm of chartered surveyors’ own admittedly expert view of that property’s prospects.
How helpful it would be, for example, for investors to fully understand the prospects of a tenant like Thomas Cook before parting with their money to buy into a property company which is its landlord? Institutional investors, at the same time, are still attracted to the 5%-plus yields offered by most UK real estate compared with government bonds yielding trading at 0%-1% or even negative rates. These investors need the yield provided by real estate to match their long-term pensions and insurance liabilities, but are also reluctant to buy direct real estate due to fears over its illiquidity.
In an era of big data, when we can forecast everything from population growth to flood risk to rising temperatures, what is the answer for valuation and the wider investment community?
Specialisation could be the answer. Not just sector specialisation, but specialisation at the level which allows investors to buy shares in individual assets of the type that will be listing on IPSX, the world’s first dedicated real estate stock exchange.
Our team at IPSX will be providing investors with more regulatory protection, more data and transparency, daily pricing and liquidity and low correlation – real estate returns from an asset investors have chosen to buy into without the drag caused by others in a company’s portfolio.
is an exciting new future for valuers in this changing world – but investors
will demand to see more of their detailed calculations as they have a wider
choice of how to buy real estate. As more and more investors buy into
individual, listed real estate assets more transparency will be needed from
valuers than ever before. The best valuers will thrive in this arena, helping
to give property investment overall a whole new lease of life.
Managing Director and Head of Capital Markets, IPSX