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Fair value measurement of investment properties
More than 90% of the companies in the survey measured their investment property portfolios using the fair value model allowed by IFRS accounting standards.
Property valuations of around 30% of those companies were, to some extent, performed by management. The approaches to management valuations varied. Some companies used management’s own valuation to assess the external valuations performed on all its investment properties as a second step. Other companies asked external valuers to value part of their investment properties and performed management valuations on the remaining part.
Overall, the discounted cash flow model (DCF) was the most commonly used valuation method by the companies surveyed. The key inputs to the valuation model continued to include discount rate, market rent and rental growth.
Lower gearing amid high interest rate environment
The average gearing for real estate companies included in the survey, using the percentage of debt to equity, decreased to 89% from 93% previously. This needs to be evaluated in light of the falling property values in many jurisdictions. Real estate companies may have been pursuing strategies to manage risk by reducing debt or otherwise managing their gearing.
Market capitalization at a discount to net asset value
There is a common phenomenon in the real estate sector where many companies trade at a discount to their IFRS net asset value (NAV). On average, based on the closing security prices at the reporting dates of each listed company, market capitalisation was 74% of the NAV with the range between 27% and 126%.
This discount may be because IFRS accounting standards do not require fair value measurement for all balance sheet items and market values of securities are impacted by myriad factors, such as the liquidity of the security, confidence about the future, applicable tax regimes and the overall market sentiment, amongst others.