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PR Newswire
28-05-2020, 09:37 AM
Investing in properties is the same as investing in companies; buy something that is cheap in relation to the future income it produces.
Valuing a property (or company) based on cap rate (or yield) tells you nothing about its future income.
Similarly, valuing a property (or company) based on other comparable properties (or 'peers') also tells you nothing about its future income.
In most cases, the future income of a property is more or less similar to its present income. If it is a good property, its future income will be higher than present income.
But in some cases, the future income of a property is less than its present income. And there are a variety of reasons for it. The income of tenants may be falling. The physical and political environment of the vicinity may be deteriorating. There may be alternative properties available with better value proposition.
Liabilities should also be considered in the valuation of a property (or company), since it has a claim on its income. There may be loans, long-term maintenance obligations, etc.
The starting point for an investor should always be the investigation of value (income of property/company), not price (cap rate/yield).
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Investors of EHT were hoodwinked into thinking it was a bargain when it was priced 50% BV (even excluding QM liabilities). Because sponsor UC never had a good chance of servicing those master leases. Which meant EHT properties never had a good chance of earning reliable income. And so the valuation of EHT's properties based on cap rates or master lease turned out to be unrealistic.
Yes, the properties are real, lots of tourists use it, and its managed by famous hotel franchises. It just isn't worth as much as the prospectuses says it should.
The EHT story is a very good lesson for those interested in avoiding pitfalls in property-related investments.
Valuing a property (or company) based on cap rate (or yield) tells you nothing about its future income.
Similarly, valuing a property (or company) based on other comparable properties (or 'peers') also tells you nothing about its future income.
In most cases, the future income of a property is more or less similar to its present income. If it is a good property, its future income will be higher than present income.
But in some cases, the future income of a property is less than its present income. And there are a variety of reasons for it. The income of tenants may be falling. The physical and political environment of the vicinity may be deteriorating. There may be alternative properties available with better value proposition.
Liabilities should also be considered in the valuation of a property (or company), since it has a claim on its income. There may be loans, long-term maintenance obligations, etc.
The starting point for an investor should always be the investigation of value (income of property/company), not price (cap rate/yield).
===
Investors of EHT were hoodwinked into thinking it was a bargain when it was priced 50% BV (even excluding QM liabilities). Because sponsor UC never had a good chance of servicing those master leases. Which meant EHT properties never had a good chance of earning reliable income. And so the valuation of EHT's properties based on cap rates or master lease turned out to be unrealistic.
Yes, the properties are real, lots of tourists use it, and its managed by famous hotel franchises. It just isn't worth as much as the prospectuses says it should.
The EHT story is a very good lesson for those interested in avoiding pitfalls in property-related investments.