In the wake of the large falls in listed market valuations for stocks, including listed property and infrastructure stocks which to date have seen pricing falls close to the same as broader equity markets, inevitably the disconnect with unlisted valuations rears its head.
Even prior to the recent market falls, private property and infrastructure asset valuations were at a premium to listed valuations. Now that listed market values have plummeted, pressure has mounted on Investment Managers and Super Funds to update values on the unlisted assets more regularly than the usual quarterly cycle (resulting in annual external valuations for most assets).
In Australia, AMP Capital is leading the way with valuers now being asked to revalue property assets in their flagship AMP Capital Shopping Centre Fund and AMP Capital Wholesale Office Fund on a monthly (desk-top) basis. Usually, non-development assets over $100m are valued quarterly and assets under $100m are valued six monthly. The valuations conducted in early February and early March 2020 will be reflected in unit prices as at 31 March 2020. The desk-top valuations on an on-going basis will be reflected from 1 April 2020.
As an indication, expectations for capitalisation rates were for a slight tightening prior to the equity market downturn. Now it is a softening in rates of 0.2% (for industrial/office) and +0.8% (retail assets). This translates to a 5% fall for office/industrial values and 15% for retail, plus estimates for rental assumptions within valuations to reduce 10%. The reality in retail property may be somewhat worse, given that trading for some retailers has completely halted.
AMP Capital has external valuations on its infrastructure investments every six months, with additional valuations if there are circumstances that will have a material implication for the value of an unlisted asset. Given current market conditions, the AMP Capital valuation committee has adopted new valuations for three assets:
- Australian Pacific Airports Corporation (-4.2%)
- Port Hedland International Airport (-7.5%)
- ANU Student Housing portfolio (-4.6%)
Given the significant halt to air traffic/passenger activity (as well as student numbers) and the unknown duration of these disruptions, further revaluations downwards would be likely to these and other AMP Capital interests (eg: interests in UK’s Luton Airport; Leeds and Bradford Airport; Newcastle Airport and US based Its ConGlobal freight train rental). Other assets may be less affected (eg: Angel Trains has long-term leases backed by the UK government).
The initial revaluations flows through to products like AMP Core Infrastructure Fund to a lesser extent (-0.8% change in unit price) given the wide diversification of its portfolio of unlisted assets (airport assets 15% of total; student housing 4%).
While the impact on unlisted assets is to date muted, the more regular revaluations will see prices of assets/funds adjust more quickly and traditional volatility measures increase.
However, the impact from the reduction in listed property and infrastructure assets has been more rapid and severe. Distributions from these sources are expected to be cut-back, but it will affect different sectors to varying degrees (communication assets and utilities holding up; discretionary retail property; user pays infrastructure seeing volume falls of 35% in Australia to 70% Europe).