EDITOR'S LETTER: A question of values

Fair value, as defined by the Financial Accounting Standards Board, is the price that an asset would fetch if sold today in an orderly transaction between willing market participants and in the most advantageous market for the asset. PERE Magazine February 2009 issue.

Let's pause now and ponder the tough task that the CFOs of real estate investment firms have in arriving at the fair values for their portfolios of properties. Let's start with the notion that fair value measures the price you'd get if you sold today.

Nobody is selling today unless they have to. You could call some of the selling participants in today's market “willing”, but in reality these sellers are forced to dump assets due to unprecedented circumstances. So if the guy one floor down from your firm is unloading a Florida mall at a fire-sale price, is that where you need to mark your relatively healthy mall in the same Boca Raton neighbourhood?

“Orderly transaction.” In the absence of any transactions, it is hard to know what “orderly” looks like. In a particularly extreme example of this, many private equity real estate firms are the owners of half-built developments that may otherwise be in good shape. But what's the fair value? What are other half-built developments selling for today?

A somewhat antiquated pejorative for a shallow and materialistic person is that they “know the price of everything and the value of nothing”. Based on this definition, general partners today are the very picture of virtue, because many of them cling doggedly to the notion that their portfolios have value, but they just can't put a current price on anything… or don't want to.

As Zoe Hughes writes in this issue of PERE, never has the often mundane process of property valuation been such an urgent exercise, and fraught with risks.

GPs that write down their values aggressively must have confidence that their LPs will understand the long-term strategy of private equity real estate. And they must also have confidence that they won't trip up any bank covenants in the process. The decision of whether to dump distressed assets now or hold on to them says much about the GPs ability to ride out the market.

As one industry veteran tells Hughes: “Do you lose the assets and impact your fund performance, or do you try to protect something that you consider to have value?”

But here's some good news for our readers – PERE's edit team has recently been joined by Jonathan Brasse, a former reporter for London's Property Week. Already Jonathan's keen sense of a good story, and his insights into the global connectedness of real estate, is invigorating our coverage of your market.

Enjoy the issue,

By David Snow