Valuation is one topic “that consistently pops up in every conversation we have with LPs” and at times is even “dominating our meetings with them” is how one GP described real estate investors’ current interest in valuation at the 2014 PERE CFO Forum in New York this week.
“They want to know how accurate we’ve been in our appraisals,” said the GP in front of a crowd primarily comprised of private equity real estate CFOs. “Have we been consistent in how we value things and what our internal policies are.”
An informal poll of delegates in attendance revealed that roughly 80 percent of real estate GPs now follow a formal written valuation policy – a significant increase from a time before Dodd-Frank pushed large real estate managers to become registered investment advisers under the oversight of the Securities and Exchange Commissions in 2012. During public speeches, SEC officials regularly have flagged valuation as a key focus area for examiners.
As stakeholders take a greater interest in valuation, delegates at the forum said GPs have to perform a balancing act between investors’ demand for a manager’s “gut take” on what an asset is worth and regulators’ demand for marks supported by objective facts and current market conditions. “In general, LPs want to hear more about the ‘art’ that goes into valuation – what does a GP actually think the property is worth – whereas auditors and regulators want to see more of the ‘science’,” one delegate told pfm on the sidelines.
On stage, one GP shared an anecdote illustrating the challenge: “We were just bumping up against the end of our annual reporting period, but we had this negotiation on a lease that was just about completed. Now, for many reasons, we knew it was going to get signed off in the coming days but, because it wasn’t actually officially done we had to make a judgment call about whether or not this massive deal actually should be included in the valuation process of the property.”
Ultimately, the GP said the firm decided to account for the unsigned lease to provide investors a more accurate representation of the property’s value.