After the large upward revaluations of their assets that the income producing real estate companies enjoyed in 2019, the coronavirus crisis is liable to cause a reversal of the trend and lead to substantial downward revaluations in the financial statements of those companies for the second quarter.
A study by investment house Meitav Dash shows that on the assumption of a 1% rise in the weighted return on which appraisers base their valuations, the three largest companies in the sector by market cap - Azrieli Group Ltd. (TASE: AZRG), Melisron Ltd. (TASE: MLSR) and Amot Investments Ltd. (TASE:AMOT) - are liable to sustain an aggregate decline of some NIS 7 billion in the values of their assets, which will mean substantial losses.
The value of Azrieli's assets, currently over NIS 24 billion, will shrink by some NIS 3 billion; the value of Melisron's assets, currently over NIS 17 billion, will shrink by more than NIS 2 billion; and the value of Amot's assets, valued at NIS 12.5 billion, will shrink by about NIS 1.7 billion.
The decline in asset values, if it happens, will be across the entire sector. Meitav calculates the loss of value for the eight most prominent companies in the sector at over NIS 10 billion.
"During 2019, we saw in the companies' quarterly financials a gradual, moderate fall in the capitalization rate used by the appraisers to value income producing real estate," says Meitav Dash real estate analyst Raz Mor. "Thanks to this decline, the real estate companies presented record revaluation profits. At this stage, capitalization rates have not yet stabilized, because financing costs are changing very quickly, and we have not yet reached the point of equilibrium in the market. But the market's entire situation is has changed, and we are facing a new world, and unless the market recovers, the decline in asset values will come."
Nevertheless, Mor says, "Just as the appraisers didn’t rush to drop capitalization rates when the market was positive, and the decline we saw in the annual financials was moderate, by a quarter or half a percentage point, they will not now rush to raise them, and will wait for new deals. This is a fairly long process. But on the theoretical assumption of a 1% fall in capitalization rates, the companies will sustain significant declines in their asset values."
Published by Globes, Israel business news - en.globes.co.il - on April 22, 2020
© Copyright of Globes Publisher Itonut (1983) Ltd. 2020