What’s the Difference Between Listed and Unlisted Property?

Forgive me if I am a little confused here. What is the difference between listed and unlisted property in fund portfolio under management?

Let’s take two identical properties and say one is a listed property and is marked to market every day. The other is an unlisted property whose value is subject to a mathematical formula applied periodically to put a book value on it for reporting purposes.

Let’s say they both have the same loan amounts, are fully leased with identical rent returns and costs.

It appears both are good investments in a bull market and not too many people worry about the actual valuations of either or whether one has a book value higher than the other.

But what if the economy turns down and both lose half their tenants and everything else remains the same. What is their value?

Assume the listed property was worth $100M and now because it is half empty it is listed at $50M.

The unlisted property also $100M, which has a mathematical formula applied to it that values it over a period of say the last five years reports the value on the books as $80M.

According to the ipac report unlisted property is down 9% in 2008 whilst listed property is down 59%. Can someone explain to me how that can be?

What is going on when it can be reported that unlisted property has outperformed listed property? How can it be compared when one is subject to market forces and the other to a mathematical whim with a time lag?

I don’t care how much effort has been put into the mathematical model, it does not and will never reflect reality. The current market situation is a case in point.

If both have to sell for any reason the unlisted property can be expected to sell for much less than it’s book price.

Take this report from ipac, “The Role of Unlisted Assets in Recent Fund Performance” with their in brief statement saying,

“Over the past year, funds with a significant exposure to unlisted assets have generally
outperformed those funds that have predominantly held listed investments. Unlisted assets are valued less frequently than listed, causing a performance lag. Evidence is beginning to emerge of small downward revaluations in unlisted assets.”

How can they say,

“Even though the underlying property assets are the same, the gap in performance between unlisted and listed property is an extraordinary 48.7% so far this year.”

And be credible. It’s like the emperor has no clothes to me.

They do say,

“…unlisted valuations typically follow the listed market – with a time lag ”

If that is the case wouldn’t you be running away from unlisted property right now since listed property has dropped by 59% or more? You have a head start it seems!

“When markets are falling, investors who exit the market early receive an artificially high price at the expense of those left behind (a situation we could be seeing now).”

Where’s all the sense in this? Can someone please tell me why funds can state their fund has performed better because it invested in unlisted property. The mind is confused here.

I think it is all about book value and that’s what got us into this crisis with the sub prime. Until an asset is put up for sale and actually sold no one knows the real price. The listed property at least gives you a real market daily indication of the price. The unlisted property might only be valued once or twice a year using a “special mathematical formula” and as such will be out of touch with reality.

Many will say that this market has over-reacted and is not real. But in truth it is. Some say you cannot apply mark-to-market pricing in this volatile market. But those same people are happy to continually increase an asset price in a bubble and try to justify that price when trying to sell it in a bubble.

They cannot have it both ways.

I just saw Gerald Celente, The Worlds #1 Trend Forecaster on cable being interviewed on You Tube by Glenn Beck. It’s scary if he is right but this is relevant here because of who he is and for saying that 2009 will see the the crash of the commercial real estate market in 2009.

So watch, wait and prepare yourself if you are in funds with unlisted property. They may be not be as secure as they make them out to be. Have a plan to exit quickly if you need to.

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