Metro Holdings

[Stocker]

Definitely not for long term hold. All Metro's properties are in PRC and all are leasehold.

[GFG]

about their metro city shanghai retail building at xujiahui just atop the tube station, the remaining lease before returning to the municipal govt partner is 17 years. Can someone enlighten me, according to the CFO, the valuation of this property will keep reducing in line with the shortening lease, so in the last year of the useful lease, it will be nearly 'zero' (which means NAV reported will be smaller as each year goes). I just wonder if this is a fair method to value such property?

or does it mean that in the 16th year from now, the valuation reported in the AR will not truely reflect the much higher real value in this prime location?

Yes, I think this is a fair way to depreciate a leasehold property. Did the CFO mention it will be depreciated over the number of years of the lease? Or is it over 50 years? (as indicated in the annual report 2.summary of significant accounting policies)
If and when the lease is renewed though, the renewed valuation of the property will have to depreciated over the new length of the lease, hence depreciation charged after that will drop significantly.

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Definitely not for long term hold. All Metro's properties are in PRC and all are leasehold.

Can I point out that the earliest leasehold property expiry is in 2029 (17 yrs away) and most of the other properties expire in 2043-2044. (32 yrs away)

[d.o.g.]

Can I point out that the earliest leasehold property expiry is in 2029 (17 yrs away) and most of the other properties expire in 2043-2044. (32 yrs away)

17 years is pretty short - it means the property will lose 6% of its value annually...

32 years = 3.1% loss per year.

These are not small rates of loss for long-term shareholders who want to hold for 5-10 years or more.

[GFG]

Can I point out that the earliest leasehold property expiry is in 2029 (17 yrs away) and most of the other properties expire in 2043-2044. (32 yrs away)

17 years is pretty short - it means the property will lose 6% of its value annually...

32 years = 3.1% loss per year.

These are not small rates of loss for long-term shareholders who want to hold for 5-10 years or more.

The leasehold office towers and malls are not technically depreciated in the balance sheets over the lifespan of the lease though. Instead, they are revalued yearly at the end of the reporting period and accounted for under "investment properties". Which is my question above, when someone said the CFO mentioned they will be depreciated. From what I can see in the AR, the only depreciation is the leasehold properties/furniture/freehold buildings etc under Property,plant and equipment.
The buildings mentioned are not depreciated but valued on a yearly basis and stated at fair value under investment properties. I do not know if the valuations take into account the amt of remaining lease left, since it is stated:
"The valuations are based on either the direct comparison method or the income method, depending on the nature of the properties"
Doesnt look like the leasehold nature is taken into account.

In any case, the value of the properties ISNT depreciated 6% annually (over the 17 years). In fact, all the valuations have actually increased (vs last year), except for the frontier building (tokyo).

[pianist]

valuation was based on income method (over the remaining lease). When the lease get shorter and shorter, it is logical to see a reduction in its nav. i am guess maybe the increase in valuation for this property since 2008 was due to 1) asset enhancement and higher take up rate for the retail space coinciding with the increase in traffice after the sub-way was opened, and 2) rental price hike?

[dzwm87]

"The valuations are based on either the direct comparison method or the income method, depending on the nature of the properties"
Doesnt look like the leasehold nature is taken into account.

In any case, the value of the properties ISNT depreciated 6% annually (over the 17 years). In fact, all the valuations have actually increased (vs last year), except for the frontier building (tokyo).

I reckon (though I have no cold hard accounting proof) leasehold will be considered in the valuation of an investment property. This is so even for a direct comparison or income method.

We stretch it to the extreme case where there is only one year left in a leasehold. I don't think it will be conservatively appropriate for an accountant to value the investment property as though it is a freehold property. Hence, at least for the case of the income method, the valuation will be done by:
1. DCF all future income until the leasehold ends and assuming the property's leasehold can't be extended and the holder loses the rights to it
2. DCF all future income and assume leasehold is extended. But this includes a replacement cost to replace the expired leasehold

If it's case (1), then it is only logically right that the investment property value will decline over the years. This is so since the end year is fixed and we are moving closer to the expiry. If it's case (2), then the concern will be one the basis of conservatism. What happen if the holder couldn't renew the lease? I won't wager too much if a huge valuation is based on its investment property. Probably, on a RNAV level, I will apply a 50% (arbitrage) discount?

Then again, I'm not an accountant and I might be wrong in my logic. (:

[dydx]

Technically, the value of Metro's leasehold commercial properties in PRC will fall to zero at the end of their respective land tenures - though it may not necessarily follow a straight line - as presumably rental rates/income and/or occupancy rates fluctuate over time, and Metro may undertake asset enhancement capex on the properties to attract new tenants or raise rental income.

[GFG]

"The valuations are based on either the direct comparison method or the income method, depending on the nature of the properties"
Doesnt look like the leasehold nature is taken into account.

In any case, the value of the properties ISNT depreciated 6% annually (over the 17 years). In fact, all the valuations have actually increased (vs last year), except for the frontier building (tokyo).

I reckon (though I have no cold hard accounting proof) leasehold will be considered in the valuation of an investment property. This is so even for a direct comparison or income method.

We stretch it to the extreme case where there is only one year left in a leasehold. I don't think it will be conservatively appropriate for an accountant to value the investment property as though it is a freehold property. Hence, at least for the case of the income method, the valuation will be done by:
1. DCF all future income until the leasehold ends and assuming the property's leasehold can't be extended and the holder loses the rights to it
2. DCF all future income and assume leasehold is extended. But this includes a replacement cost to replace the expired leasehold

If it's case (1), then it is only logically right that the investment property value will decline over the years. This is so since the end year is fixed and we are moving closer to the expiry. If it's case (2), then the concern will be one the basis of conservatism. What happen if the holder couldn't renew the lease? I won't wager too much if a huge valuation is based on its investment property. Probably, on a RNAV level, I will apply a 50% (arbitrage) discount?

Then again, I'm not an accountant and I might be wrong in my logic. (:

well said. I think the key question, the answer to which I do not know, is whether the remaining lease is taken into consideration by the valuers doing the valuation. If it is, technically the value of the investment properties would decline over time, even with asset enhancements or rental rate increases. In an extreme scenario: if there's only 1 year lease remaining, no amount of asset enhancement will avoid the fact that the valuation has to drop to 0 after that 1 year.
This would be the logical and conservative way to value it IMHO.

Accordingly, if the lease is renewed, the fair value of the properties should be significantly increased.

[Boon]

"Upon expiry of the term of grant under the land use right grant contract, the user of non-residential land may apply for renewal of land use term by submitting an application at least 12 months in advance. Such application will be granted unless for public interest the land needs to be taken back by the state. If the application is granted, the land user is required to enter into a new land use right grant contract, pay a land use right grant premium and effect the necessary registration of the renewed right. If no application is made, or such application is not granted, the land use right shall revert to the State and the buildings and fixtures on the land shall be handled in accordance with the agreements set forth in the land use right grant contract."

Please download "TCT Introductory Document" from this link and refer to page 213 to 214. No idea on quantum of land premium to be paid.

http://ir.treasurychinatrust.com/phoenix...tsArchives

[Stocker]

The lease expiry issue was raised 3 years ago and Lawrence Chiang replied was the rentals were high and by the time when the leases are expired, we would have collected more than enough rental. He couldn't confirm the lease will be extended or not.
During one AGM , the CFO ever said the valuation based more on the cash flows than the value sof the lands or buildings.