What is the right way to value unlisted property?

APRA has stated that it is looking to improve investment governance on stress testing, valuation and liquidity management for unlisted assets. Whilst the focus is on this governance within superannuation, the concerns are universal.

As is the case when an industry is left to its own devices, some players adopt very high standards and use them as a point of pride and difference, whilst some players adopt much lower, perhaps questionable, standards.

Falling into the former category is the Centuria Diversified Property Fund. The fund aims for best practice valuation standards. It is an open-ended, multi-asset, unlisted property fund that aims to provide investors with stable income returns and the potential for capital growth by investing directly and indirectly in a diversified property portfolio.

I recently sat down with fund manager Doug Hoskins who is responsible for the performance and management of several of Centuria’s unlisted property funds to discuss why valuation methodology is important, the practices that Centuria has adopted and how they help investors.

This is part three in a three-part series. The earlier wires in the series can be accessed below:

• Experience, access and diversification - how Centuria is doing property differently
• Why property diversification is important and how to achieve it

Why are valuations so important?

“Property valuations are one of the main contributors to the net asset backing of unlisted funds”, notes Hoskins when asked about their primary importance. A net asset backing is important as it helps investors understand the value of their investment. Some funds offer daily applications, where investors can enter the Fund based on the prevailing unit price.

“Valuations impact the unit price and that unit price is the value that an investor can either exit the fund at or come into the fund at, so it's very important to keep these valuations up-to-date” adds Hoskins.

The other element that Hoskins speaks to, which is noted above, is that of valuation frequency. This is critically important for a diversified portfolio in an open-ended fund.

“If the valuation hasn't been done for a couple of years, it could become stale and there's a risk that investors may be disadvantaged by stale valuation”, notes Hoskins.

He goes on to provide two examples.

An investor potentially could be exiting the fund at a unit price lower than what the current valuation should be, or, conversely, entering the fund at a unit price that's higher than the current valuation.

“It's really important to keep valuations regular, accurate, and up-to-date”.

So, what does Centuria do?

Hoskins shares that, "in my experience, some fund managers may value their properties via an independent valuation once every two years, although it will vary".

In terms of the Centuria Diversified Property Fund, the frequency is currently higher.

“In the current environment, the Fund’s property portfolio is valued four times a year and two of those valuations are independent, which is above and beyond the Fund’s current policy of having the property portfolio independently valued at least once every two years. This helps to ensure that the unit pricing is current and reflective of current market conditions”, says Hoskins.

How Centuria adds value

Outside of the valuation process outlined above, Centuria is focused on adding value for investors throughout the asset purchasing and management process.

When it comes to acquiring assets, Centuria leverages the experience of its transaction team (discussed in this wire) to generally buy off-market, at competitive prices.

“We try and avoid competitive tender processes, so when we purchase a property, we usually purchase it well”, says Hoskins.

The other way the team adds value, both for investors and tenants alike, is through the management of the assets via the in-house asset management team. The team has great visibility over the direct assets and the tenants that occupy them, and this helps Centuria to retain its tenants.

“The team works hard to develop strong relationships with tenants and is also across market conditions”, adds Hoskins.

“We work hard to build rapport with our tenants and that gives us good visibility of what they're likely to do. The key feedback we get from our tenants is whether they're happy at the building or unhappy, and what’s going well, what’s broken, etc. 

Through that feedback, we can employ some strategies to keep the tenant happy and retain them".

Hoskins notes that getting good visibility does a number of key things:

First and foremost it ensures that across the portfolio, Centuria is in a strong position to achieve rents that are fair value.

“We know what the market rents are. We're across our tenants. We are across the portfolios and we have the ability to drive rents, which can help maximise the value to investors. And by driving those rents, it helps to improve income to the fund. It can also help to improve the valuations of the properties, says Hoskins.

Secondly, the feedback provided by tenants allows Centuria to know what is important to tenants and what competitors are doing.

"We get feedback from our tenants and know what our competitors are doing. We strive to make sure that the nuts and bolts in the buildings are on par or better than our competitors".

“One of the worst things you can do is come to the end of lease and have the tenants say ‘we left because the air conditioning doesn't work and your lobby and lifts are average", says Hoskins. "If we get that feedback from the tenants, we can proactively do some works which increase the likelihood of retaining those tenants”.

In the event that a property does become vacant, the improvements also help reduce the probability of downtime, which again is beneficial to valuations, cash flows and, ultimately, the investors.

Whilst all of the above sounds good, Hoskins was able to provide some practical examples as well.

Centuria owns a commercial office building at 10 Moore Street in Canberra, which is currently seeing upgrades to the end-of-trip facilities and the installation of a breakout area that will be complementary to existing tenants. And, for a bit of added wow factor, the breakout area will have a full commercial-grade golf driving range simulator and a lounge area.

Similarly, at 8 Australia Avenue, Sydney Olympic Park, Centuria owns an A-grade office building that is also going through a lobby and end-of-trip facilities upgrade. It’s also going to have a rooftop breakout area.

As Hoskins duly notes, when potential tenants come and view these buildings, having seen three or four already, “they can go, ‘Hey, remember that one with the excellent lobby, the excellent end-of-trip facilities and that golf driving range? That's special. I actually want to be at that building".

Find out more

If you would like to know more about how to gain access to the Centuria Diversified Property Fund and all the benefits that it provides, please click here for more details.