The Valuation of Interests in Real Estate Limited Partnerships

The growth of private real estate vehicles in the last decade has been one of the most significant shifts in UK and European commercial real estate markets. In 1991, investment in such vehicles in the UK was recorded at approximately £13bn by 2003 the comparable figure was £48bn (PVD, 2004). Building on earlier work in Australia by Newell and Fife (2002), this paper focuses on the valuation of (fractional) interests in Limited Partnerships in the UK. In addition to being diverse in terms of size, number of investors and number, quality and type of assets limited partnership vehicles also vary according to fee levels, terms of legal agreement and management quality. An investment in a Limited Partnership that owns a real estate portfolio or asset offers different investment qualities than direct ownership of the same portfolio or asset. These can be categorised in terms of costs and benefits. In terms of costs, relative to direct ownership the investor is faced with a range of potential costs generated by lack of secondary trading, high management fees, additional complexity of Limited Partnership structure, potential for conflict with co-owners and inappropriate gearing structures. On the other hand, key benefits are that investors can gain exposure to assets that are normally too ëlumpy', has limited liability, tax efficiency, interest alignment with managers and access to gearing. A key question has been whether such interests have underlying values that generate a premium or discount relative to their proportion of net asset value. Due to the thin trading and a high degree of confidentiality in the market, it is difficult to draw any useful information from actual trades that have taken place. Despite the differences from direct ownership, the standard appraisal approach is a pro-rata division of the net asset value of the real estate assets. Based on a survey of major (mainly real estate) investors, we use an analytical hierarchy process (AHP) to measure the relative significance of the various costs and benefits of LP interests relative to direct ownership of the assets. The reported results will provide insights into the key factors in pricing interests on UK Limited Partnership vehicles.