A recent EPRA study found the quality of reporting of listed property companies in Germany below the European average. A new Feri survey finds variations within Germany, as well as serious transparency shortfalls in Austria and Switzerland. Helmut Knepel reports
The debate surrounding the valuation of real estate portfolios of listed property companies in recent months has shown that investors and analysts do not recognise the plausibility of valuation mark-ups. Ultimately, last year's hefty markdowns of quoted prices must also - to a great extent - be attributed to a lack of faith in the quality of company reporting which is less than transparent. To shed more light on a rather opaque investment vehicle, Feri Rating & Research created the Feri Transparency Rating for listed property companies. To this end, Feri analysed the statements of account of listed property companies in Germany, Austria, and Switzerland with a minimum reported market capitalisation of €50m. The survey focuses on companies where rental income tends to make up more than half the total revenue. The ongoing discussions among listed property companies bring to mind the situation of the open-ended property funds a few years ago, when analysts criticised the so-called re-measurement gains, and accused valuation experts of practicing a rather elastic interpretation of their valuation margins. At the time, fund providers resisted the idea of increased transparency, particularly at property level. They argued that any reporting of individual market values would weaken their position when negotiating the sale of a given property, and would thus be detrimental to the investor's interest. Notwithstanding these counter arguments, analysts vehemently demanded more transparency in order to establish a capital market standard, and it is this standard that listed property companies, of all market players, seem frequently unable to meet.The listed property companies should actually learn from the mistakes of the open-ended property funds, which ultimately culminated in a crisis. The responses to the transparency rating, and the attempts of companies to explain away the missing data by pleading a variety of circumstances at property level, clearly echo the arguments that representatives of open-ended property funds pursued for many years. These arguments include, for instance, the suggestion that investors were not interested in details of individual properties anyway, and that many analysts simply lacked the time to process such vast quantities of data.
In their own interest, listed property companies are well advised to draw a line under this sort of debate - that is, the sort that dragged on for years in the case of the open-ended property funds - before it even gets underway. There is no better way to inspire faith than by putting your cards on the table. In the real estate business, this means disclosing the key parameters used for the real estate valuation, thereby demonstrating their plausibility vis-à-vis independent analysts and critical investors.The capital market always calls for maximum transparency, and punishes its absence with proportionate markdowns for the risk involved. In the recent past, this is exactly what happened to some of Germany's listed property companies. While the companies do publish ample information on the debt financing share, on the long- and short-term loans, and on possible currency exposure, transparency shortfalls are often found in the property records. This is precisely the kind of information required to demonstrate the plausibility of the company value given that the latter is largely defined by the real estate in the portfolio. One look at the statements of account of listed property companies reveals that the portfolio level - to say nothing of property level - leaves much to be desired in terms of transparency.
Numerous listed property companies fail to publish complete records on the market values of individual properties, on rent revenues, on assumptions regarding sustainable rental income, and on tenancy quotas, or indeed they fail to publish any such records altogether. As such they are in stark contrast with open-ended property funds who have become much more transparent in recent years. According to the Feri transparency rating, the transparency ratio for German listed property companies averages 35%, whereas it stands at about 62% for open-ended property funds, not least because the latter have by now established a standard of their own.The Feri transparency rating is based on the assessment of three key areas. Firstly, the transparency of the asset situation (investments and revolving assets), which has a 75% weighting. The other two components are the debt capital and the calculation of the net asset value. The overall transparency ratio is calculated on the basis of 230 separate criteria. The transparency assessment of the asset situation focuses on the portfolio of investments.
The definitive factor for the ratio is the transparency at property level. For the survey Feri checks the type of information a given company provides in respect of its individual properties. Transparency at property level is defined by three criteria, each with their own weighting. General property data accounts for 10%; information about the income situation of the individual properties represents 45%; the disclosure of the tenancy situation is weighted at 25%, and value information with 20%.
As far as general information is concerned, the companies that perform best are those that provide - in addition to address, year built, and quality of location - information on a building's lettable floor area, on the date of its most recent modernisation or redevelopment, and on its remaining economically useful life. As for the income situation, a count of 80% is achieved whenever a given company lists both the actual rent and the annualised rent potential.The highest level of transparency was shown by Polis Immobilien (72%), Fair Value Reit (67%), and Alstria Office Reit (54%). Bringing up the rear among the 29 companies analysed by Feri was DIBAG Industriebau with a transparency score of 15%. The top transparency score in Switzerland went to Züblin Immobilien Holding at 51%. In Austria, finally, Conwert Immobilien Invest received the highest rating at 41%. Striking about the international comparison is that the average transparency rating in Switzerland (46%) exceeds the German average (35%). Austria, in turn, shows a mean transparency ratio of about 30% only.
Helmut Knepel is member of the board of Feri Finance AG, and management spokesman of Feri Rating & Research AG, Bad Homburg/Germany
