No. of Recommendations: 3
REITs generally get their assets externally appraised, using a) recent sales of similar properties b) fair estimate of income being made c) any other relevant market factors.
The appraisals are pretty regular.
To brutalize a metaphor: As usual in the real estate field, it's not a matter of where the puck is now, but where the puck is going.
It's not so much that one has any cause to doubt the current appraisals (though that certainly happens), but that one often has cause to doubt that current appraisals have any relevance for what's about to happen. Especially as "current" appraisals are always a bit backward looking, based as they are on recently completed transactions even when done honourably and skilfully. Think of them as "if by chance you had been fortunate to have contracted to sell this a few months ago, you probably would have realized XXX", but not much more than that.
The UK RE price trend is not good these days in a broad sense, so perhaps a "prudent man of business" should not assume that asset values a year or two from now, which is what you're really interested in, will be the same or higher than the current appraisals. There are very serious cracks showing here and there, for the moment in obscure or irrelevant corners. But one should probably conservatively assume that the cracks are spreading. Assume there are more cockroaches, or that the liquidity situation might suddenly deteriorate a lot.
None of that affects long term valuations past the current cycle, but it can be tough to wait out a down cycle. Some firms have probably not sufficiently battened the hatches.
Jim
