Surprise gap in property returns

One of the many remarkable aspects of investment returns over the past financial year was the strong performance of unlisted assets, especially unlisted property.

According to some reports, unlisted property delivered returns of 17.7% compared with listed property’s disappointing -8.9%.

A gap of almost 27% forces us to ask what is going on.

Because unlisted property is privately owned, owners of these properties need to have them valued by independent experts. Their estimated values are based on deep understanding of the property market and sound economic reasoning. They would also argue that any higher return from unlisted property is the reward for illiquidity.

Listed property, as its name indicates, is held in a fund listed on the stock exchange. Its value is simply what the shares are worth.

While we expect some differences in unlisted versus listed property valuations, we don’t expect gaps in the order of 27%. Trouble is, there’s no way of finding out who’s right or wrong until they try to sell the unlisted property.

But while we can’t resolve this debate, we can at least try to manage it. Owners of unlisted property should be transparent about who does their valuations and they should be willing – depending on the nature of the fund (eg, is it a public offer or private?) – to share how the valuation was derived.

Financial regulators also need to put up guidelines on how valuations of unlisted property should be done. Regulators that have concerns about any valuations can then call in property owners and demand they explain themselves.