Relative to Europe and the US, Asia-Pacific is a more diverse market – and a more challenging region to standardize performance reporting.
Danny Mohr, CBRE head of international valuation, Asia-Pacific, tells PERE one of the major challenges to valuing assets on a pan-Asia basis is the level of required disclosure varies by country. The Pacific markets of Australia and New Zealand are more transparent and make detailed property data readily available, whereas information can be harder to access in other markets in the region.
The use of the principal valuation approaches – market, income and cost – also differs by jurisdiction. In more mature markets such as Japan, Australia and Singapore, valuers typically adopt the income approach, using capitalization of net income and/or discounted cashflow methods. In less mature markets, appraisers often adopt a simpler income approach or a market approach.
Asia-Pacific jurisdictions also have different definitions for the same terminology, which makes the aggregation of performance figures a challenging process, according to one valuation firm. For example, the definition of gross floor area varies across the region in terms of what components of a building are included.
Diverse currencies in the region are another issue, according to Henry Ching, Asia head of real estate at consulting firm Mercer. “Fluctuations in currency can have a big impact on the performance and can cause distortion. A lot of international funds are USD denominated so they measure their IRRs in US dollars after they convert the prices of the assets from local currencies. But does that value truly reflect the performance of the assets, or it is a result of currency movements against the US dollar?” Ching questions.
Indeed, currency fluctuation in the region has had a significant impact on asset values during the pandemic. For example, the Japanese yen dropped significantly in early February as the US dollar rose to 111.60, its highest level in nine months. At the same time, the US’s threat to de-peg the US dollar and Hong Kong dollar due to the national security law has also indirectly added volatility to local real estate values.
Trent Iliffe, managing director at logistics manager LOGOS Property Group, agrees it is important to take the currency exchange movement into consideration when assessing performance. He says LOGOS always reports in base currency, then converts at monthly rates into US dollars.
In addition, the Asia-Pacific region uses a range of accounting standards – such as US generally accepted accounting principles in Australia, the International Financial Reporting Standards in Singapore and local GAAP in Japan.
For example, LOGOS uses China GAAP for local investors and the International Financial Reporting Standards for international investors. “As most of our investors are international, we undertake two different sets of reporting – local and international. This affects measurement, as onshore reporting is more cash based in most Asian countries,” says Iliffe.
Covid’s impact on reporting in the region
Ching points out managers and appraisers have grappled with the decision over whether to write down the value of assets because of covid-19. “A lot of them are still taking a wait-and-see attitude because things are changing so quickly,” he says.
A senior executive at a real estate consultant firm also tells PERE many managers felt justified they held valuations steady in the first quarter after most Asia-Pacific markets rebounded sharply in the second quarter. “For those who acted more aggressively in marking down assets in the first quarter, many have marked their assets up more in the second quarter,” he adds.
Most managers also increased the frequency of property appraisals during the pandemic to give their investors more insight into performance, according to Adrian Harrington, head of capital and product development at Australian manager Charter Hall. For example, the firm usually values its assets twice a year in December and in June. But it undertook an out-of-the-cycle valuation review last month for its office and industrial funds.
Pre-covid, most non-core funds in Asia-Pacific only did external valuations once a year and conducted internal valuations quarterly, while core funds did external valuations more frequently because of their open-ended structure, according to Ching.
Harrington tells PERE most managers have received additional reporting requests from investors during the pandemic, including information on the underlying performance of tenants, the industries they operate in and the status of rent collections.
“Our investors want to know how the fund’s income has been impacted by the relief we have to provide under the Federal Government’s Code of Conduct for Commercial Tenancies,” he says. Under this code, which the Australian government introduced in April, landlords are advised to provide rent reductions to small and medium sized tenants during the pandemic and subsequent recovery.
Meanwhile, South Korea’s ABL Life Insurance has requested last year’s performance numbers from managers to better understand the pandemic’s impact on returns. “You want to know what the action plan for recovery is and to make a profit going forward,” says Jiroo Eoh, the insurer’s team head for real estate and infrastructure.
The pandemic is a perfect stress test to identify the right partners for the long term, adds Eoh: “During covid-19, you can see which manager is reliable depending on their attentiveness and response to our requests. So, we can actually find the most appropriate partners in the future based on how they treated us during the pandemic.”