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Global financial reporting trends in real estate 2024

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EY’s Survey looks at financial reporting trends for annual IFRS reports to 31 March 2024 of over 50 real estate companies around the world. 

In brief

  • Fair value measurement, performed by external valuers, was the most common valuation method used by companies; some companies performed their own valuations.
  • Many companies reported falling property values. They have made efforts to reduce their debt ratios, which are down on average from 93% to 89%.
  • Alternative performance measures - numbers based on IFRS with some adjustments that are useful to users - were widely used by most of the companies surveyed.     

The latest EY Real Estate Sector IFRS Financial Statements Survey has been released. The survey covers the most recent annual reports - up to 31 March 2024 - of over 50 real estate companies across the globe to understand the latest financial reporting trends. This article highlights some of the findings of the survey.

Watch the video discussion of the survey findings and download the slides for a more detailed analysis

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.



The average market capitalisation of the companies surveyed was 74% of the NAV, with the range between 27% and 126%.



Use of alternative performance measures

Many real estate companies publish what are referred to as alternative performance measures (APMs) which are usually based on IFRS numbers, but then adjusted to give information that management believes readers of the annual report would find useful.

The survey shows that three quarters of companies disclosed APMs of some type. Most of them followed some industry guidance, while less than 20% of them produced their own APMs in lieu of, or to supplement, common industry metrics, albeit these were not dissimilar to those common industry versions.  



Three quarters of companies in the survey disclosed APMs to provide information they believed would be useful to users of their annual reports. Less than 20% produced their own APMs instead of, or to supplement, common industry metrics.



Sustainability disclosures gaining prominence

All of the entities in the survey had some information about their environmental, social and governance (ESG) targets and policies, but as they are driven by different requirements in various jurisdictions it is difficult to effectively compare them.

However, the survey showed that just over half of the companies had financing arrangements where the pricing had some links to achieving ESG targets, most commonly on energy efficiency or emissions reduction, or where the funds could only be used for projects to achieve such ends.

Conclusion and future trends

This survey provides a helpful snapshot of the current financial reporting trends of real estate companies globally.  As central banks in many jurisdictions start to ease monetary policies, it would be interesting to monitor how the gearing of real estate companies will change over time.

It is also worth noting that IFRS 18 Presentation and Disclosure in Financial Statements will become effective in 2027 and this new standard will likely change the current financial reporting practice about APMs.

As sustainability reporting becomes more mature and comparable across companies, future surveys may provide additional insight on the sector’s efforts to achieve their environmental and social goals.

Summary

In a muted real estate market for many in 2024, EY’s Global IFRS real estate survey shows some clear trends in the financial statements of over 50 companies. Dominance of the fair value model was observed for the investment portfolios of over 90% of companies surveyed. 

The average market capitalisation of the companies surveyed was 74% of the net asset value, with the range between 27% and 126%.

There was a focus on risk strategies to manage debt exposure as property values fell in many regions. Alternative performance measures (APMs) were also widely seen in financial reports in the survey. 

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