Listed property companies face changes to the way they calculate the net asset value of their investments, with the organisation responsible for the amendments saying an update to the metric had become “critical”.
The European Public Real Estate Association said changes to NAV measurement will be introduced for accounting periods starting in January 2020 and that workshops across the continent during the next 12 months will educate property companies on how their reporting will be affected.
The new regime will replace EPRA NAV and EPRA NNNAV (triple net asset value) with three new metrics.
EPRA said the first, net reinstatement value (NRV), will represent the value required to rebuild the entity, with an assumption that no asset 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.
EPRA said the changes reflected a “significant evolution” of the listed property sector during the 16 years since its Best Practices Recommendations were introduced.
With 14 real estate investment trust regimes in Europe, EPRA said the business model for such firms had shifted “from long-term passive asset owners into highly active asset managers and capital allocators” and that “an update to the main KPI was now critical”.
“Given that active capital recycling and dynamic portfolio management are now taken into consideration when calculating the metric, the new NAV metrics provide investors with a clearer picture of property companies’ underlying operations and business models,” EPRA said.
The association added: “For example, one of the issues with the old EPRA NAV was, due to its design, to ignore the latent capital gain tax liability that existed on the balance sheet, arguing that this would ‘never’ crystalise, as the asset would ‘never’ be sold. As such, the three new NAV metrics provide three alternative scenarios for the latent capital gain tax liability effect.”
The changes come after two years of consultation between EPRA, property companies, analysts, investors and the big four accountancy firms. EPRA said the changes would not make reporting more onerous for companies and should not create new work for equity analysts covering those companies.
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