The issue of valuations has long been a tricky one and, indeed, controversial in times of falling property values (see Expert Commentary below). However, governance of this area of private equity real estate has at least become a little more defined after the European Association for Investors in Non-listed Real Estate Vehicles (INREV) revised its official guidelines for managers on the issue.
Unveiling changes last month as part of an 18-month review into corporate governance, liquidity and reporting, INREV said one of the main changes managers should abide by is to ensure external valuers have the appropriate qualifications to competently carry out the task.
Designed to further improve transparency, the industry body also emphasised the need for managers to implement a review and approval process of the valuation. It also introduced detailed guidance on what to do if there is an impact on the market value of a fund due to a decision to liquidate or wind down.
What to do when a manager disagrees with a valuation also is in the revised principles and recommendations. Finally, INREV has stipulated that the end product of the valuation process should be one single number.
Lonneke Löwik, INREV’s director of professional standards, said the guidelines on valuation were last refreshed in 2008 and the reason it was deemed necessary to update them was to keep in line with the new Alternative Investment Fund Managers directive (AIFMD), which regulates this area.
However, one managing partner at a European firm pointed out that, despite the guidelines, managers have a choice. They can either value the assets themselves; the manager can value but an auditor validates; or a third party can be appointed, typically a property services firm.
Apples for apples
Paul White, chairman and chief executive of London-based Frogmore, makes a plea for greater transparency among fund managers when it comes to valuations
I am often asked about the accuracy of valuation and how this translates into fund returns, as investors find it hard to compare like with like.
To start with, one has to accept the principle that valuation is not always a precise science. For lots of assets in the UK, we are very fortunate that it usually gets very close to being so.
I have no criticism of UK valuers as they have many decades of creating a very professional service, which I think leads the world in determining open market value. However, I do often feel very uncomfortable with the way in which the information is used or not used, or often not even asked for.
Not everyone treats valuation in the same way. I would have thought that it is common practice to have external valuations undertaken at least annually, but sadly we are told that this is not always true. The Frogmore approach is to use external, independent, industry-recognized valuers to value annually that then form the basis for the reported NAV and the value of each investors equity and then to assess the value of the assets again on a quarterly basis. The most important issue then is to communicate this information to our investors.
When values have gone up, we leave it for the annual valuation to catch up but, when values were falling, we notified our investors in the next quarterly report. So, in essence, good news can wait, while not so good news is given to investors as soon as it becomes apparent.
As I see it, transparency on valuation shouldn’t be a choice – it should be an obligation. Valuations should be annual, valuations should be external and they should be transparent. General partners should feel obliged to let investors and/or shareholders know when values drop, so that the value of an investors’ interest can be more easily assessed. I do not believe that ‘to only justify the outturn at some point in the future’ is good governance on the part of the GP and certainly is not what I believe investors currently require.
During 2008/2009, the value of UK real estate has variously been described as having dropped between 25 percent and 40 percent. However, some GPs chose not to revalue, and investors have quite rightly asked why.
The tell-tale signs for those who have not accurately revalued their assets is easy to see. If values still are being carried at the same figure now as they were in 2008, it is clear that they were not revalued. If they had been revalued at any stage between then and now, the improving UK market that we all are witnessing would have shown values that would have increased. If they show values having gone down or remaining static and therefore have not seen values rise since, then the GP has not been transparent in showing values during that period that investors can rely on.
Hopefully, 2014 will see the start for investors to be able to compare like with like.