Polygon Expects Significant Valuation Uplift Following Realia Business, S.A. Adoption of RICS Standard

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Apr 08, 2019, 02:30 ET

LONDON, April 8, 2019 /PRNewswire/ -- Polygon Global Partners LLP notes the announcement made by Realia on 21 March 2019 that the company has decided to change the method of valuation of its residential real estate holdings from Order ECO 805/2003 of 27 March (ECO) to the RICS Valuation – Global Standards 2017 (the RICS Red Book) (RICS).

Polygon considers that Realia's improper application of ECO to its residential land portfolio between 2012 and 2017, and the application of an undefined and unrecognized valuation methodology in 2018,¹ has resulted in the significant understatement of Realia's residential land value. Polygon therefore anticipates that the company's recent adoption of the RICS standard will cause a significant valuation uplift. In this regard, Polygon notes the following:

In 2012, Realia's adoption of the ECO standard resulted in an immediate reduction in the value of its residential land portfolio from EUR 1,056 million to EUR 486 million.²
In 2013, Realia excluded 1.2 million square meters of buildable land from its accounts as the result of the winding up of certain subsidiaries and town planning issues.³ Other than these 2013 exclusions, there has been no material change to the portfolio of residential land held by Realia since 2011.

Realia Residential Land Portfolio 2011 – 2018, adjusted for 2013 exclusions

(EUR mm)

	RICS	ECO
Year	2011	2012	2013	2014	2015	2016	2017	2018^()*
Reported Value^(*)	1,056	486	378	358	344	282	282	269
Adjusted Value^(**)	734	412	378	358	344	282	282	269
Change		-44%	-8%	-5%	-4%	-18%	0%	-4.5%

(*) Source: Realia results presentations 2011 – 2018.
(**) 2011 and 2012 values adjusted for 1.2 million square meters of buildable land excluded in 2013.
(***) 2018 values exclude the acquisition of a plot of land in Alcalá de Henares for EUR 27.8 million.

Published data from the Instituto Nacional de Estadística (INE) establishes that prices of newly built residential units in Spain have rebounded to near 2011 levels.

Percentage Variation in Newly Built Residential Units in Spain 2011 - 2018

Year	2011	2012	2013	2014	2015	2016	2017	2018
	-5%	-12%	-10%	1%	5%	7%	6%	6%

The evolution of the value of Realia's residential land published by the company using the ECO standard, when compared to the development of house prices in Spain over the same period, suggests that there has been a material mispricing by Realia of its portfolio, as can be seen in the following graph:

Adjusting for 2013 exclusions, but all other things being equal, it is Polygon's view that Realia shareholders should expect a rebound in the value of the residential land portfolio following the company's adoption of the RICS standard that is at least equivalent to the decrease in value suffered in 2012.

An equivalent mark-up would result in the value of Realia's residential land portfolio increasing from EUR 269 million to approximately EUR 730 million. Such an increase would move Realia's published NAV from EUR 1.25 per share to more than EUR 1.8 per share.

Polygon also notes that in light of its concerns with the improper application by Realia of the ECO standard, Polygon filed an initial complaint with the Institute of Accounting and Auditing (Instituto de Contabilidad y Auditoría de Cuentas) (ICAC) on 14 January 2019. Following its review of the 2018 financial statements of Realia Business, S.A., Polygon filed on 25 March 2019 an addendum to its public complaint with the ICAC.

^¹Realia 2018 annual accounts (Note 10) and 2018 consolidated financial statements (Note 14).
^²Realia results presentations for 2011 and 2012.
^³ Realia results presentation for 2013.

Contact: Polygon Global Partners LLP ([email protected])

SOURCE Polygon Global Partners LLP