Investing money naturally comes with risk. In my view, investors in open-ended real estate funds should feel comfortable knowing that they have a clear and true view of the value of their fund investment. But in the past two years, open-end fund valuations of logistics assets have significantly lagged the market—by as much as 1,000 basis points in Q4 2023 and more than 700 basis points through the first half of 2024.

What are valuations and why do they matter? 

Valuations are simply what they sound like – an estimate of the market value of the assets within the fund. For Prologis, those assets are class-A logistics real estate properties in some of the world’s most desirable population centers. Accurate and timely valuations of assets matter greatly. Without them, investors cannot have confidence in where they are putting their capital and whether they are paying appropriate management fees.  

State of play: 

Recently, many fund managers’ valuations have been slow to account for deteriorating and/or underlying fundamentals, such as higher borrowing costs and wider risk premiums. At the same time, declining transaction activity – the traditional measure for providing accurate valuations – means fewer inputs in the valuation process and less confidence in the outcome.  

Many investors aren’t surprised to learn that valuations on paper sometimes lag real world estimates—the magnitude by which they lag today is what’s concerning. It’s mind-boggling when you think about the power of today’s technology to provide real-time financial information.

What’s at stake: 

Lagging valuations impact investments made by limited partners (LPs) and pose a risk to the reputations of general partners (GPs) and any appraisal firm providing them. Lagging valuations in a down-market favor investors who are cashing out and discourage new investments as price and value differ. They may also artificially inflate management and performance fees. 

Call to action: 

Fund appraisals blend art and science. Appraisers need to capture the complexity of the business environment through concrete data and subjective analysis. An investor-centric approach can improve fund appraisal practices:

• Diversify: Appraisers should consider a wider array of inputs to determine fair value, including real-time investor yield requirements and cost of capital, to more accurately reflect how investors come to their own conclusions on what fair value means during a period of limited sales activity.
• Engage: Relying on a single firm to provide valuation oversight can lead to bias compounding the risk of lagging valuations. Engaging multiple independent valuation service providers ensures the market is fed with insights from experts with broader experience in their respective markets.
• Re-evaluate: LPs should question whether fund values reflect real-time market sentiment. This requires regular scrutiny and transparent reconciliations of changes in valuations based on the market environment.

Bottom line: 

Investors should be squeaky wheels about getting accurate and timely valuation information. Without accurate valuations, investors cannot confidently invest their money and trust they will see the returns funds claim to deliver.  

Investors who invest alongside Prologis in our funds know we’re committed to ensuring fund valuations reflect market inputs on a timely basis, which helps protect the interests of all stakeholders.