Over a decade and a half, the European Public Real Estate Association’s net asset value measurement has become an accepted, dependable metric for listed real estate companies; the reporting equivalent of a comfortable, well-worn pair of jeans. Now, EPRA is switching up the wardrobe.
Out go EPRA NAV and EPRA NNNAV, or triple net asset value, the two measures commonly used by property firms to value their portfolios. In their place, three new metrics will be introduced for accounting periods starting in January 2020.
Changes to such widely understood measurements will have a far-reaching effect, even given EPRA’s assurance that neither property companies nor the analysts covering them should have a more onerous workload.
“The EPRA Best Practice Recommendations for financial reporting have been widely adopted by listed real estate companies and are also often considered by private real estate companies considering a potential IPO,” says Andy Pyle, partner and head of UK real estate at KPMG. “So any changes to the BPR, or the underlying measures like EPRA NAV and NNNAV, after 16 years of increasing use, are important.”
Different world
EPRA’s argument is that the listed property world has changed, but the ways in which companies value their assets has not.
“The EPRA NAV metric was introduced 15-16 years ago – at the time the listed real estate market was different to how it is today, from a business angle and from a REIT regime angle as well,” says Hassan Sabir, EPRA’s director of finance and sustainability. “Over the past 15 years we have seen REIT regimes spread out in Europe and businesses getting more complex as well.”
The result was that the traditional NAV had been “left behind”, Sabir adds. EPRA claims the new measures take “active capital recycling and dynamic portfolio management” into account in a way that NAV and NNNAV never did.
The first new metric, net reinstatement value (NRV), will represent the value required to rebuild the asset, with an assumption that no sale takes place. The second, net tangible assets (NTA), assumes that companies “buy and sell assets, thereby crystallising certain levels of unavoidable deferred tax liability”. Finally, net disposal value (NDV) will reflect shareholders’ value under an orderly sale of the business.
“One of the issues with the old EPRA NAV was, due to its design, to ignore the latent capital gains tax liability that existed on the balance sheet, arguing that this would ‘never’ crystalise, as the asset would ‘never’ be sold,” the association said in a briefing document on the changes. “As such, the three new NAV metrics provide three alternative scenarios for the latent capital gains tax liability effect.”
The changes have been on the cards for some time. EPRA’s Sabir says the association held two years of consultations with property companies, analysts, investors and accountancy firms.
And analysts have argued before that the system could be improved. In a note published in October, only weeks before the new measures were revealed, Mike Prew at Jefferies wrote that the EPRA recommendations “probably need to include a third version, such as reinstatement NAV, tangible NAV or liquidation NAV, to address larger/fractionally owned assets where liquidity can be an issue, especially if held through complex corporate/offshore structures”.
“Keeping us on our toes”
Early reactions to the changes from London-listed companies have been broadly positive.
“Basically, it gives you different NAVs – a NAV for if you were trying to recreate the portfolio, [through] to if you were trying to sell off the portfolio,” says Martin Greenslade, chief financial officer at Landsec. “I think that is helpful as long as one clear metric emerges so we all know what we are talking about when we talk about NAV.”
At Palace Capital, finance director Stephen Silvester expects that “NTA is going to become the new EPRA NAV”, adding: “NTA is going to give us the most useful information, the most comparable.”
Nonetheless, Silvester says there will be understandable worries that increasing the number of metrics used in financial reports – even in this instance from two to just three – is a risky move.
“The risk is that they end up with too many metrics and it becomes complicated for an investor,” he adds. “If you look at how many of the REITs out there produce all the EPRA metrics, most companies have gone down the route of chucking everything in. I think when this comes around, all three will get put in a lot of people’s reports. I think it potentially muddies the water. Sometimes less is more.”
Indeed, company bosses are now starting to get to grips with what the new measures will mean for their reporting.
Peter Greenslade, finance director at Warehouse REIT, says that while the changes “seemed like a logical extension” to existing measures, the company needed time to “consider and digest” them.
“They are keeping us on our toes,” Greenslade says. “We report our full-year results in March 2020, so we need to fully understand the new measures, even if we don’t have to use them.”
Jonathan Murphy, chief executive of Assura, a REIT focused on healthcare properties, says: “We haven’t run the numbers yet, but I am very supportive of the broader principles. It will make things more comparable – they will strip out intangibles from the valuation, where there is always an area of subjectivity, so it is positive.”
Increased workload?
During the next 12 months EPRA will launch workshops and webinars with national real estate associations to educate property companies on how their reporting will be affected.
EPRA’s Sabir says the association expects that “somebody who has been dealing with these topics in their careers should be able to pick this up very quickly and easily”. But in the near term some analysts expect more work on their own part as well as the companies they cover.
Kunal Sawhney, chief executive of equity research firm Kalkine, says the calculation of the new metrics “will definitely increase the workload, despite EPRA’s education plans,” adding that “companies would be expected to provide a bridge between the old and new metrics for both the current and comparative accounting periods”.
Regardless of the effort over the coming year, Sabir argues that the changes are overdue and will ultimately be beneficial to an increasingly diverse listed property market.
“Once the market understands it, they will find there is a lot more information to shift through, a lot more granularity to shift through, and a lot more transparency – which is ultimately the objective of this disclosure.”
Additional reporting by Pui-Guan Man
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