takeover now more likely than ever, page-43

Let me explain it this way.

If you buy a shop ( bricks and mortar ) for 100k, which the tenant in the shop pays $10k per annum rent.
What's it worth ? Whatever you can sell it for.
If you want a valuation for it, you can multiply the rent by some P/E say 10x, you get 100k.
You can also assume that whoever buys it from you will want a 10% yield on their investment, rent is $10k, therefore value is 100k.
You can also say, well that sort of property has a capitalisation rate in the current market of 10%, divide the rent by 10% 10k/10% is 100k.
Actually all three of those methods are variations of the same thing.
Now the Book Value of the building in the "assets" column of your balance sheet will be $100k. Its a real asset. Now if you bought it several years ago for 80k there would be some accounting/tax stoogery about whether it has a book value of 80k or 100k, but that isnt the issue here.

Now suppose you are the tenant, a barbershop. Now suppose your only assets are your chair and your scissors, worth 1k. Now suppose your business generates a net profit of 50k. Now suppose you want to sell it. Now the value of a service business is going to depend on a lot of things, like local competition, the probability that the customers will still come in when some new barber buys the shop, whether the actual goodwill will transfer to a new owner, whether the building owner will agree to assign the lease, and so on. But suppose the p/e ratio for a well-located barbershop with no local competition is 2x. Then you can sell the barbershop business for 100k.

Now although the barber could potential sell his barbershop business for 100k, same as the freehold owner could sell his freehold of the shop, the "book value" of the barbershop business is only 1k. If the shop was closed down and could not be sold as a "going concern" then all you would get from the fire sale is 1k for the chair.

The barber's balance sheet would only have 1k of assets in it. ( Unless he paid another barber before him 100k a couple of years ago in which case his balance sheet may have 100k of intangible goodwill in it ).


Now the issue with centro ( as distinct from a straightforward plain property trust or a passive investment vehicle whose income is dividends or rent derived from hard assets ) is that a lot of the income is not just rent from wholly-owned entities but also distributions and management fees from partly owned or externally owned entities. And part of the value ascribed by the market to centro ( before the crash ), is a valuation of that management fee business which is a value component not backed by actual assets ( in the same way that most of the valuation of woolworths or the aforementioned barber shop is not backed by actual assets ).