Norman Bowie
It does not seem so long ago that some of the market players were bemoaning the fact that they found it difficult, if not impossible, to secure long-term finance for large development schemes or to find buyers for companies or properties or portfolios which they wished or needed to sell. The scene changed quite recently, but the question now has to be asked — did all investors get a fair deal?
Whole property companies have in the last two years or so been swallowed up and broken into pieces to make large profits for the new owners, while mergers — which are often but a polite name for sell-outs or takeovers — have demonstrated that markets always adjust to changing circumstances. Portfolios of properties do not always change hands for cash but sometimes for paper — perhaps earning a yield far below that paid by the properties — which is then swapped for money by a third-party investor. Securitisation is on the doorstep in a variety of disguises, and it will be interesting to see how the game is played.
The aggressive players know what they are doing, while many of those on the defensive, along with their advisers, seem to be either outmanoeuvred, ignorant or have their own good reasons to take a softer line. It is in this scenario that the person in the street, and even the smaller institutional funds, suffer too often as there is no one around who really cares to look after their interests. Surprisingly, many investing bodies seem blissfully to accept advice and recommendations without doing their homework by combing through the printed matter to question and probe. The self-regulatory system works up to a point, but there are some yawning gaps in it. It is too late to act after the event: the referees need to be alert and blow the whistle when there is a foul-up or a party is offside. Recent events and the current and emerging scene call for a greater awareness of what needs to be done if more damage is to be prevented and self-regulation regains the good name it deserves.
The great property boom of 1973 saw some strange methods of asset valuation until exposed by John Plender’s article under the headline “Valuations Devalued” in the Investors Chronicle. The RICS reacted vigorously and their Asset Valuation Standards Handbook (the Red Book) contains guidance and standards written in close consultation with the accountancy profession and the regulatory authorities, such as the Stock Exchange and the City Panel on Takeovers and Mergers. The Red Book has now for many years been recognised and accepted, yet directors, professional advisers, merchant bankers, auditors, reporting accountants and the regulatory authorities not infrequently allow unjustifiable departures to pass — or do they look the other way? It is not unknown for a senior executive in a merchant bank advising on a property deal to admit that he had not heard of or seen the Red Book. The City Panel have said on at least one occasion that they cannot require a revaluation of the property assets.
Two major issues, British Telecom and British Gas, both departed from the accepted basis of valuation. British Gas, in their first annual report and accounts, again err. The TSB also failed to obtain the consent of the various asset valuers concerned and include the appropriate reference in the customary closing paragraphs of the prospectus. Thus the valuers were deprived of the opportunity of checking that their valuations were correctly used and accurately reported. One can but wonder why the Stock Exchange allowed the offers to take place and be published, and others involved did not do their job to see that proper standards were followed. Is it too much to expect that such major companies and all concerned with them should give a positive lead to the market by setting impeccable standards?
These were non-property companies, so perhaps the defaults may not have been too material to the share price, but when a look is taken at the property company scene it must be a matter of much greater concern. This is particularly true when cosy deals are done between companies with the support of large shareholders (often director-led) and without a contest between rival aggressors.
Perhaps one day someone will research and write about the way in which the cashrich Berkeley Hambro was led to the altar to a warm welcoming embrace by Town & City, coming out of its struggle to survive from the property crash. Hambros Bank, troubled with its shipping loans and the mighty Prudential, who had heavily financed Town & City, were the major shareholders in BH, if not in a majority.
Barclays Bank, who through a joint company, not inappropriately named Towbar, had financed the acquisition of Central & District on a shortfall basis just before the end of 1973, were no doubt deeply interested in what was going on and to see that their interests were not overlooked. Views have been expressed as to whether the minority shareholders would not have been better off if the company had been left alone or better terms obtained elsewhere in the market.
More recently, in August 1986, in the uncontested takeover of United Real Property by Mountleigh, there was no up-to-date property valuation. All the shareholders had available to them in the offer document was a reference to the accounts of April 5 1985 which themselves incorporated an April 1983 valuation (although the directors’ report in 1985 indicated this was about £3m below the 1985 value). The April 1986 accounts had not been published. So perhaps this accounted for the directors and their advisers “believing the terms of the offer to be fair and reasonable” — hardly a strong recommendation to accept. The valuers apparently were not asked to give their consent to the reference to the valuation, nor also to its use for a different purpose, namely a merger/takeover instead of for incorporation in the company’s accounts.
It is now clear that Mountleigh picked up a bargain — indeed Tony Clegg was reported in the Evening Standard as saying “I can promise you we’ll be making that price look cheap”. Mountleigh are making handsome profits by trading, but to be fair it is true to say that the market for, and value of, some of the properties has also improved.
At least Lynton Holdings with its merger partner Property & Reversionary both wisely had up-to-date valuations made for the benefit of all shareholders. But no one knows why the directors of the latter company seemed to have somehow discouraged an approach from Speyhawk who were indicating they would make a much higher offer.
The creation of Imry International from Imry Property Holdings and Arbuthnot Properties also saw the regulatory authorities looking the other way. While Arbuthnot had an up-to-date valuation, Imry directors did not bother, but “took a view on subsequent changes in value” on the March 1986 figure — and then did not even think to tell the shareholders what they thought. So the non-director shareholders were left adrift with a nine-month-old figure as a passing reference in the offer documents and for the publication of which no consent from the valuers was sought. If the valuers protested, it never came out. Shareholders can now read in the first report of the new Imry that values had in fact moved up by around 11% over the year. It could be that on a pro rata basis the actual asset value of the old Imry by January of this year had risen to the region of 450p — a far cry from the 402p on which the deal was struck.
Cynical minority shareholders can be forgiven, in the absence of more openness by directors, if they have a feeling that the minds of major shareholders, and directors who have large shareholdings, are somewhat influenced by a desire to protect their present and future personal positions.
The PFPUT saga earlier this year with the background of a rising City property market helped the trust to resist the earlier attempts of Trafalgar House to grab the assets cheaply. The management committee seem to have realised that the whole portfolio was worth more than the sum of the parts and obtained a premium of around 20%. On the other hand the committee accepted the highest approach made to them and apparently made no attempt to go out into the market so as to be seen by the unit holders as getting the best price available by a proper exposure, unlike the Fleming Property Unit Trust.
Mountleigh must surely be expecting to make a profit which, it can be well argued, really belongs to the unit holders. It is reported that Mountleigh have already sold half of the portfolio to make a profit, including a farm holding of some 2,500 acres on the edge of Chelmsford, for £35m, producing a little over £150,000 pa, an exit yield of 0.44%. One can only conjecture with this news on the inner feelings and reaction of the Committee of Management, the trustee, the property managers and the unit holders. The Committee of Management are to receive £250,000 and Hambros Bank, the trustee, £500,000 for severance of services.
This year also the prospectuses of Wilson Bowden, the housebuilder, Adscene and Archives Security all saw departures from the Red Book, which should not have been allowed to pass by the watchdogs.
Investors in the soon-to-be-launched PINCs, SPOTs and SAPCOs must realise that they will be minority holders left with no one except auditors, external advisers and sponsors plus the regulatory authorities to hold not only a watching brief but to ensure that at critical moments there is a full disclosure of the current state of play by the majority owners and managers. It is no good writing standards and rules if they are not enforced, and seen to be enforced. If the property market continues its present trend towards a greater degree of integration with the securities market and the UK gradually integrates into the global market, compliance will assume an even greater importance.
The self-regulatory system is clearly not functioning as it should over property valuations and it needs to get its act together. The RICS have written sound and accepted rules for guidance but they can only act, as they often do, after the event, when damage may have been done. One answer may be for the RICS to be directly represented on the controlling regulatory authorities and the watchdog bodies. If something is not done, perhaps the answer will have to be in statutory control like the United States’ SEC — sadly yielding an even greater feast for the lawyers than under the new SROS.
No longer should directors, committees of management and trustees be allowed to be so secretive over the affairs of their organisations and keep to themselves the vital facts of the properties in the portfolios. More openness will create a sounder market and encourage more investors as they gain greater confidence. If there is too much secretiveness there will always be a risk that the probing analysts of property stockbrokers and market makers will gain, in private, information and valuable impressions from senior management and directors, which will enable them to prejudge price movements to the advantage of particular clients. Directors and managers should surely not talk about affairs over a private lunch or a visit. It happens, sadly, in the securities markets but there is no need to allow it to occur in the new emerging property market.
The great advantage of direct ownership of property is that the investor is master in his own house and of his own destiny. He knows all the facts and is not in the disadvantageous position of a part-owner and often a minority one at that. He is not dependent on others publishing all the facts which he needs so as to make a proper judgment. Nor does he have to hope that the regulatory authorities will really watch over his interests in detail.
If an investor does not have sufficient funds to obtain a spread of directly owned property, the new vehicles must be attractive. He will need access to good professional advice on what to buy and when to sell. He will also need to understand that the investment made is partly in management skills and a degree of faith that the majority owners will act as trustees for all unit/shareholders.