How did Tesco value its stores…

Tesco announced today a staggering loss for the last financial year. The loss includes a 3.8 billion GBP write down of property.

This begs a question. As far as I know the UK property market has recently improved.

Which begs the question as to whether Tesco valued its property portfolio on a true open market reflecting land prices and comparative rental values or on discounted future profit streams expected to be generated by the stores? If the latter then that valuation is actually a valuation by default of goodwill (trademark) which in accordance with economic theory allows the company to generate super profit over and above that generated by a no name competitor.

Now unless I am much mistaken you are not allowed to reflect either self generated goodwill or self generated brand value in the balance sheet. And only a significant fall in expectations for future profits could underly such a significant write down of property values. Or maybe Tesco are just admitting that no one will be interested in buying or renting their large hypermarkets should these need to be sold.

Which just goes to show the trap companies fall into assuming values will keep on rising.

Polish property market and planning regulations

With the UK (or whatever it will be called should the Scots decide to go alone) showing double digit rises in property values is the same about to happen in Poland?

Theoretically property values should be rising in Poland yet this has not as yet happened. Of course one reason is that the banks remain highly cautious about property based lending. And this is no bad thing as Poland was sheltered from the more abrupt value falls seen particulalry in the US, UK, Spain and Ireland. The boom there has been led by what in retrospect can be seen as irresponsable lending. Logic would dictate that with continued economic growth in Poland demand should be building up nicely. And indeed it is but is matched by supply.

The (lack of) Polish planning regulations and in particular agricultural zone and brown field developments ensure that it will be some considerable time before future supply, both of commercial and domestic property, can be predicted with any degree of accuracy. Whilst the building permission process is still cumbersome and not particularly transparent there would appear to be few constraints on type of development, zoning and density of development. Which all conspires against development of long term property investment and rational lending policy by the banks.

But then on the positive side a low underlying land value to building cost ratio ensured that falls in value caused by the global economic crisis were far less dramatic than elsewhere and add a further reason why values are not rising.