Key to Union Properties loss

The huge valuation loss on properties to the tune of Dh870.362 million has pushed Union Properties, the first listed property company in the country, into loss for the nine-month period ending September 30, 2010.

The analysis of the Profit & Loss statement of the company for the period shows that, if not for the valuation loss, UPP would have ended up the nine-month period with a modest net profit of Dh120m instead of Dh750.913m net loss.

The company has stated that during the nine-month period, management has carried out a detailed review of the carrying value of its development properties. “A fair valuation study was done by an independent registered valuer, and accordingly, a fair valuation loss of Dh690m has been recognised in the interim condensed consolidated income statement for the nine-month period ended September 30,” it said.

An additional loss of Dh180.362m recognised through the valuation of investment properties together with the loss emanating from the fair valuation of development properties, took the aggregate loss on valuation of properties to a substantial Dh870.362m for the period.

In fact, a loss of Dh620.385m on account of valuation of properties has led Union Properties to post a net loss of Dh498m for the year 2009, whereas the previous two years, 2008 and 2007 saw healthy profits on the strength of valuation gains.

While a valuation gain to the tune of Dh880.114m during 2008 has helped the company end the year with a net profit of Dh763.100m, Dh307m valuation gain during 2007 has played a key role in the company turning in a net profit of Dh686m for that year.

UPP follows the fair value model under International Accounting Standards (IAS) 40 (revised in 2003) where investment property defined as land and buildings owned for the purpose of generating rental income or capital appreciation, or both, are fair valued based on an open market valuation carried out by an independent registered valuer.

In the case of UPP, the valuation by JAJ Consultants was carried out in accordance with Appraisal and Valuation Manual issued by the Royal Institute of Chartered Surveyors (RICS).

Through the mid-2000s until 2008 end, when the property companies were in their initial years and the UAE had been witnessing a property price boom, many listed real estate companies had taken advantage of IAS 40 and added substantial gains from fair valuation to their P&L statements.

However, the 2008 fourth quarter saw the market trend changing in the opposite direction and the properties that basked in the price boom and the corresponding benefits given by IAS 40 clause started feeling the pinch of the same clause in the accounting standards.

Though UPP is under pressure from the short-term loans, during the nine-month period, the company could repay long-term bank loans amounting to Dh694m obtained from various banks.

The company has stated that during the same period, it has obtained a term loan facility from a bank. The outstanding loan as of September 30, 2010, as per the company financials, amount to Dh205m. Moreover, during the period, UPP has renegotiated the repayment term of certain short-term bank borrowings related to a significant shareholder. “The short-term bank borrowings are now considered as long-term bank loans. The outstanding loan amount as of September, 30, is to the tune of Dh824m,” the company statements reveal.

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