Open letter to the Audit and Control Committee of the Board of Directors of Realia Business S.A.

LONDON, June 20, 2019 /PRNewswire/ --

Mr. Juan Rodríguez Torres
Ms. Ximena Caraza Campos
Mr. Elías Fereres Castiel
Audit and Control Committee of the Board of Directors
REALIA BUSINESS, S.A.
Av. Del Camino de Santiago, 40
28050 Madrid

19 June 2019

Dear members of the Audit and Control Committee of the Board of Directors:

Polygon would like to inform you that we have commissioned Sociedad de Tasación for the production of two independent valuation reports, carried out using the RICS standard, for the plots that Realia owns in Retamar de la Huerta (Alcorcón, Madrid) and Guadalquitón (San Roque, Cádiz). These independent reports show a total valuation that is approximately 10x higher than the total valuation published by Realia for these two plots, resulting in a very significant valuation discrepancy of over 70 million euros, as is summarised in the following table:

Both of Sociedad de Tasación's independent valuation reports use conservative assumptions with regards to the time expected to obtain the permissions needed (general and partial plan where needed still, as well as urbanisation and re-zoning plans), as well as to carry out the necessary urbanisation works, and a conservative estimate of the cost of such urbanisation.

We would be happy to share a copy of these reports for your reference.

In response to several of the questions asked by Polygon during the recent Annual General Meeting of Realia, the Company appeared to place sole responsibility for the valuation of its residential land bank on the company's independent external valuer.

Based on the "hecho relevante" published on 22 March 2019, Realia will, for the first time since December 2011, apply the RICS valuation standard to value its residential land bank as of June 2019.  We would like to highlight that the RICS valuation standard depends on a number of inputs that will be supplied by Realia to the company's independent external valuer by means of a business plan for its development. The inputs of such business plan will have a very material effect on the land bank's valuation. These inputs include:

• Time to planning / urbanisation / final licensing
• Costs of urbanisation
• Number of units planned, and split between private and affordable, as well as other commercial uses
• Timing for start of construction
• Construction costs
• Timing of sales of final product

Due to the importance of these inputs in the final valuation reached by the independent external valuer, the company has an important responsibility to furnish the valuer with accurate and realistic data about the development prospects of the portfolio so that the valuation of the land reflects the true net realisable value of the company's assets.

Given the very material difference in values that we have ascertained, of over EUR 70 million, by analysing only two of the plots owned by Realia, it is clear that historically the valuations presented by the company to its minority shareholders and the market have been unreliable. As a result, Polygon is concerned that an overly conservative business plan provided to Realia's independent external valuer could have the effect of artificially and improperly depressing the valuation of its land bank.  We would seek to take action in such an event.

We have already noted several attempts by Realia to minimise the potential impact of re-implementing the RICS standard of valuation. The CFO of the company, when asked about the potential impact of moving from ECO to RICS at the 2018 Annual General Meeting, stated that the potential differences "should not be very relevant". And again in the answers provided to our questions at the 2019 Annual General Meeting (to question A10), the Board stated that "the values should be very close". It seems that both Board and management have made up their mind about valuation even before the company's independent external valuer has done its work.

We would like to remind the members of the Audit and Control Committee that Realia valued its residential land portfolio, the composition of which has remained materially unchanged, at over 730 million euros using the RICS standard as of December 2011. The prices of new homes in Spain are now equivalent to the prices then, as can be easily seen from the official statistics of the Instituto Nacional de Estadística. Furthermore, mortgage availability and the number of housing transactions are actually at better levels than they were in 2011. We believe it is also reasonable to assume that the degree of urban development of the portfolio has not deteriorated over the past eight years, but rather that Realia has continued to advance these developments, as is its corporate purpose.

Thus, all else being equal, Realia's residential land portfolio must be worth at least as much now as it was in 2011. We expect that the company's H1 2019 financial results using the re-adopted RICS valuation standard will reflect this fact.

Finally, we would like to inform the members of the Audit and Control Committee that a copy of the independent valuation reports carried out by Sociedad de Tasación has been provided both to the ICAC and the CNMV for their consideration.

Sincerely,

Polygon Global Partners LLP

Cc:     Mr. Juan Rodríguez Torres (Chairman of the Board of Directors of Realia)
          Mr. Francisco V. Fernández Romero (Partner, Ernst & Young)
          Mr. Ignacio Martos (Chief Executive Officer, Tinsa) 
          Mr. Jose Antonio Hernández (Managing Director – Spain, Tinsa)

Contact: Polygon Global Partners LLP ([email protected])

SOURCE Polygon Global Partners LLP

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