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News Article
Comment on Financial Mail of 26 September 2003
27 February 2006
Although dated 2003, this article shows relevance due to the emphasis on valuation of property, and more specifically those included in listed property portfolios.
The article on page 64 of the above-mentioned edition of Financial Mail, deals mainly with the consequences when property are being overvalued, and as such, is drafted into an existing property pool/portfolio by a buyer, who, also knowingly, adds the inflated property to his portfolio. This phenomenon has major ramifications with reference to unit prizes, and the consequential overprized shares. It is stretched, in this article, that the JSE does not require an auditor 's report on the contracted future income (in most instances this will mean the future rental income) of the specific property. This means that a property can be obtained with, say a Woolworths as tenant, but Woolworths can be in their last year of the lease agreement to that specific property, which means that the property might lose its main, and difficult-to-replace, income stream after one year of listing. These potential future losses of income, do not have to be included in the auditor's report, and is an important unknown factor to any potential investor. It has a major influence in the value of a property, and it is common cause, that the future rental income stream of a property, to a great extent, determines the value of such property, and therefore also its valuation into a portfolio.
If it is tenanted to the full, and with quality tenants bound by relative long-term leases, it should be an easy task to obtain a realistic valuation of the property. If not, the property is in danger of losing its source of income, and it will take a brave man to put value to an income that might, or might not be there in the future. In a pool of properties, like most listed property funds are, this loss will have to be recovered, and mostly these recoveries are made up out of inflated unit prizes. This is, in some ways, one of the problems with pools of property, where a bad choice in property has to be made up for by the other properties in the same pool. The writer does acknowledge, though, that in some instances such a property pool can also create stability, but then again, the stock exchange, where these listed properties are bought into, can hardly be identified as a stable environment, and has to affect listed property in this regard as well.
People buy into listed property, mostly for the reason that a diversified portfolio seems to be a safer bet than a single property, and they expect that from listed property. But, the article, referred to above, stretches the fact that some listed funds use overvaluation to ensure they get good-quality properties. Details of such valuations do not have to appear on the balance sheets of listed institutions, where they could be questioned, or at least compared to the valuations of its counterparts in direct property. The author, of the said article, states further that property owners tend to ignore the fact that overvalued properties determine the (over) valuation of the shares they get in the property, as part of their payment. This make them partner to the deception, too, suggests the mentioned article. There seems to be good reason to revert back to the old proven saying that quality is better than quantity, and, in the property world, for quantity to have substance, it has to be quality property as well.
The fact of the matter is that property need to be selected along the guidelines of: location; access to main highways and airports where applicable; adoptive in nature to the effect that they will still be in demand in 10 year's time; the rental need to be market-related; good and diligently-selected tenants; multi-tenanted; proportional, so they can be sold more easily at market price, where the market is just that much bigger than that of too large properties.
These guidelines, in the writer's opinion, are followed by Bluezone Investments, if one looks at the way Bluezone Investments obtain their property, and the way the investment is structured. It gives the investor, as shareholder, control of the way he wants his property to behave. The investor can identify the property he wants to invest in. It places him in a better position towards a hostile tenant-controlled market, in the sense that the rental income have not already been included and capitalized into the form of listed units. As investor, it is possible, to even lower rental of the property he has invested in, in order to be more tenant-friendly in a world where there is still, to some extent, an oversupply of office space. Again, a quality property, together with the flexibility and control to the investor, granted by the investment vehicle created and sustained by Bluezone Investments, can go a long way to be one of the more solid property investments one can make these days.
Izak van Niekerk
Director Head Legal (Compliance) Bluezone Investments Pty Ltd
Bluezone is an Authorized Financial Services Provider,
license number 21227
