REIT ASIAPAC
COLUMN
Column
compliant REIT s started a three-phase
strategy to enhance performance, which
included rejuvenating its portfolio
through selective divestments and active
asset management and renewal of its
leadership.
KPMG:
VALUATION IS MORE THAN
JUST RUBBER STAMPING
AUSTRALIA
Rural Funds Group Wins Legal
Battle Against Allegations Of
Overstated Valuation
Agricultural real estate investment trust
(REIT) Rural Funds Group was embroiled
in a battle against Texas-based activist
short-seller Bonitas Research.
In August 2019, Bonitas Research
published a report that claimed, among
others, that Rural Funds Group overstated
the value of its assets and that its equity
was “ultimately worthless”.
It claimed that Rural Funds Group’s true
net asset figure was only A$268 million
as of December 31, 2018. Shortly after
Bonitas published its report, Rural Funds
Group’s stock price plummeted by more
than 40%, wiping A$335 million off its
stock value. Rural Funds Group then went
into a trading halt and issued a statement
to reject the claims made by Bonitas.
In the statement, Rural Funds Group
said Bonitas’ allegations of financial
impropriety
and
irregularity
are
“unfounded”. It also announced that it had
engaged Ernst & Young to “independently
investigate the matters raised and assess
Rural Funds Group’s rejection each of the
claims made in the document”.
The accountancy firm released its findings
on September 27, 2019. “The independent
investigation conducted by Ernst &
Young concludes that the assertions
contained within the Document are not
substantiated,” the firm said in a statement.
Rural Fund Group later filed legal
action against the short seller for its
“deliberate and malicious publication
of the document”, which constitutes
“misleading and deceptive conduct.” The
manager of Rural Funds alleged that it
“suffered losses and damages as a result
of the making of the allegations, for which
Valuation is a necessary part of investing in real estate. The opinion of a
professional valuer is used to underpin the acquisition of an asset, as well as
inform ongoing decision making, financial reporting and disposal. It is fair to
say that a significant level of risk is placed on the shoulders of the valuer.
New Tech Park, Singapore (Sabana REIT)
Bonitas and Matthew Wiechert are liable
to compensate, including by way of an
account of profits”.
On February 12, 2020, the Supreme Court
of New South Wales judged in favour of
Rural Funds Group, saying Bonitas made
“false” and “misleading” statements.
HONG KONG
PAG Questions Spring REIT
Manager’s Mall Acquisition and
Other Transactions
Alternative investment management
firm PAG has been active and vocal
about its criticisms against Spring Asset
Management—the manager of Spring real
estate investment trust (REIT).
On February 11, 2020, PAG issued an
open letter to the Board of Directors
of Spring Asset Management Limited
and
its
controlling
shareholder
Mercuria Investment Limited urging
them to “address Spring REIT’s serious
underperformance”. PAG holds an 18.2%
interest in Spring REIT and is considered a
material unitholder.
Among the main issues were the REIT
manager’s proposal to acquire the
Huamao Place shopping mall in Huizhou
from Huamao Focus, which is a unit of
Huamao Property Holdings, for RMB
1.65 billion ($240 million) in 2019. The
manager withdrew its proposal after two
independent proxy advisors recommended
that Spring REIT’s unitholders reject the
18
acquisition.
By Stephen Williams
PAG said the proposed transaction would
have involved the issuance of shares at a
44.3% discount to NAV, resulting in a NAV
dilution of 8.1%. While the acquisition
was terminated, Spring REIT incurred
significant expenses as a result of this
failed acquisition, for which the manager
provided no acceptable explanation, PAG
said in the letter.
In the letter, PAG cited other NAV-
dilutive transactions which included
HK$585 million in convertible bonds to
a consortium led by Sino-Ocean Group
Holdings Limited. Conversion of these
bonds will result in a NAV dilution of 3.8%
and a DPU dilution of 3.0%, it said.
In 2018, Spring rejected a voluntary
general offer by PAG of HK$5.30 per unit.
This offer would have allowed unitholders
to realize over nine years of cumulative
distributions, which was equivalent to a
70.4% premium to today’s unit price, PAG
said. Spring REIT is also trading below its
IPO price of HK$3.81.
In
an
exclusive
interview
with
REITAsiaPac, Kevin Leung, Spring REIT
Managing Director, said they are aware
of the concerns about the fact that they
are trading at a discount. “But again, the
entire sector (in Hong Kong) with just one
exception is trading at a big discount to
Net Asset Value. We will remain focused
on delivering strong cash flows to our
unitholders going forward, which is our
mandate,” he said.
RICS, Director, Deal Advisory, Valuation Services with KPMG Singapore
and whys but can also provide the reader
with insights into the opportunities and
threats to future income.
AN AUDITOR’S
PERSPECTIVE
Stephen Williams
RICS, Director, Deal Advisory,
Valuation Services with KPMG
Singapore
The International Valuation Standards
Council (IVSC) produces valuation
standards (IVS) that set out the minimum
content that should be provided
in a valuation report. Around 130
organisations in over 150 countries, as
well as many financial intuitions and
investors, have adopted the valuation
standards. The 2020 edition has just come
into effect. An IVS-compliant valuation
report allows the end-user to know the
asset, as well as clearly understand the
limitations of the report, the underlying
assumptions, and the thought process
that the valuer has adopted in reaching
their conclusion. This information not
only allows the reader to realise the hows
Over the past few years, I have reviewed
valuation reports for various purposes,
both as a regulator and as an auditor,
covering large and small practices across
the Asia Pacific and beyond. I have often
come across reports that exclude various
pieces of critical information, which may
include comparable evidence (including
the analysis), or the rationale as to why and
how the valuer has adopted the various
inputs and reached their conclusion. In
some cases, the interest being valued has
been omitted, or information about the
surrounding area has been insufficient.
Both are key drivers of value.
WHY ARE THESE
ISSUES A PROBLEM?
As mentioned previously, valuation
reports underpin significant financial
decisions, and it is important to ensure
that these decisions are truly informed.
While the valuation number may be
appropriate, a short report with minimal
supporting information does not allow
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an informed decision to be made. This
will then lead to the end-user, and their
advisors reverting to the valuer, asking
questions about the valuation, requesting
additional information to understand
the conclusion of the valuer. This often
takes more time than including it in the
valuation report from the outset, and
therefore drives profitability down, which
can have a knock-on effect on future
valuation quality.
T H E VA LU E O F VA LUAT I O N
Why does information get omitted?
Valuation is often seen as a means to
an end rather than a valuable piece of
consultancy. Valuers are under increasing
time pressure which, coupled with
downward fee pressure, means that the
valuer often feels it necessary to cut their
cloth accordingly. This perpetuates the
provision of short, information-limited
reports.
Valuers have a significant amount of
knowledge and experience, as well as
access to data that can be analysed
and adjusted to specific investment
parameters and can offer the investor
significant insights into the asset. But with
fees being driven lower, valuers are less
willing to share this valuable knowledge.