The Reliability of Investment Property Fair Values Under IFRS

Journal of Property Investment & Finance, Vol. 29, No. 1, 2011

Posted: 16 Nov 2010 Last revised: 21 Dec 2010

See all articles by Thomas Nellessen

Thomas Nellessen

Handelshochschule Leipzig (HHL)

Henning Zülch

HHL Leipzig Graduate School of Management

Date Written: November 15, 2010

Abstract

Purpose - The valuation of property companies and fair value accounting for investment properties under IFRS are closely affiliated with each other. This is because property companies are commonly valued using net asset value as a valuation technique. The term net asset value represents the fair value of a property company’s assets less its liabilities and therefore can easily be determined, as under IFRS investment property is often re-ported using a fair value approach. This paper examines the perception of fair value estimates for many companies’ main asset: investment properties. With this it contributes to the stream of real estate finance literature that investigates net asset value deviations from property companies’ share prices and to the stream of accounting literature that investigates fair value accounting.

Design/methodology/approach - For the purpose of the paper we investigate the association between the net asset values of European listed property companies and their market prices. We relate observed deviations to a wide set of variables using panel (un-balanced) OLS-regressions.

Findings - We find that net asset value usually departs from the market capitalization of European property companies. We also find that those deviations are a result of insufficient reliability of fair value estimates of investment properties because of the limitations of appraisals, the diversity of applied approaches in appraising investment properties and the reliability problem for mark-to-model approaches usually applied in determining the fair value of investment properties.

Keywords: Investment properties, NAV, NAV discounts, IFRS, reliability, IAS 40, EPRA

JEL Classification: M41, L85, G15, D82

Suggested Citation

Nellessen, Thomas and Zülch, Henning, The Reliability of Investment Property Fair Values Under IFRS (November 15, 2010). Journal of Property Investment & Finance, Vol. 29, No. 1, 2011. Available at SSRN: https://ssrn.com/abstract=1709277

Thomas Nellessen (Contact Author)

Handelshochschule Leipzig (HHL) ( email )

Jahnallee 59
Leipzig, D-04109
Germany
+49 (0) 341 6404660 (Phone)
+49 (0) 341 9851702 (Fax)

HOME PAGE: http://www.hhl.de/faculty-research/faculty/accounting-auditing/

Henning Zülch

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, Saxony D-04109
Germany
+49(341)9851701 (Phone)
+49(341)9851702 (Fax)

HOME PAGE: http://www.hhl.de/faculty-research/faculty/accounting-auditing/

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