Point of view

Following the publication of our latest annual reports we had a number of discussions with some analysts and investors (as we did last year for that matter) with respect to the write-off in value that we have published on our short leased assets.

We usually argue that from our perspective we would offer a lower price for a vacant building than we would for the same asset with a one year lease, which in turn should be cheaper than the same building with a two years lease … We always felt it makes a lot of sense to reflect this into our valuation process, and thus devalue every year the short dated assets to reflect the shorter lease term.

A recent article published by property magazine international (http://aox.ag/Ii71mp) is bringing a new perspective to the subject, based on a recent IPD analysis (this is the IPD Press release http://aox.ag/HVdOBX).  

According to IPD (as quoted by the article), UK landlords who give tenants five years leases immediately wipe out almost 2% of the value of their building.

Quote: “IPD lease length analysis shows that signing a new five year lease leads to a fall in value of around -1.8%, despite the property being let.”

Let’s all take a deep breath and step back for a minute to look closer to what IPS is suggesting here? If I read this correctly, the valuation of building which have signed a new five year lease (so which obviously were vacant or closed to be vacant) have LOST value because of the new lease. In other word, if investors would have paid 100 for a vacant building, they would only pay 98 for the same building with a five year lease. In essence, you would be better off keeping the asset vacant, rather than signing a short term lease. I don’t know about you, but this does not pass my smell test.

I might have a very twisted mind, but I would like to suggest another explanation for the whole story. What if the initial valuation of the building was wrong? What if the asset was never worth 100 in the first place? What if the new lease has shown beyond dispute that the assumption to get to the 100 value cannot be hold on to? Can it be that if the building was initially worth only 90 or 95, then the 5 year lease did increase the value to 98?   

From where I stand, in 99% of the cases, a cash flow producing asset is going to be worth more than the same asset vacant. Regardless of the length of the cash-flow. As such, we do devalue our assets when they are close of becoming vacant and we do show an increase in value when leases are renewed.

Where do you stand?