Do investors get the full picture from corporate real estate accounting?

Do investors get the full picture from corporate real estate accounting?

Dominic Burke

Dominic Burke

Senior Director

t. +44 (0)20 7182 2596
e. dominic.burke@cbre.com

Lorraine Howells

Lorraine Howells

Director

t. +44 (0)20 7182 2054
e. lorraine.howells@cbre.com

CBRE are launching a series of three thought pieces challenging the practice of how corporates account for their owned real estate. Our first piece considers current practice, why this method is adopted and the risks that are associated.

Accounting guidelines allow companies to hold their owned real estate assets at either Fair Value or at cost. Typically, most corporates account at cost, which would be the price that they either bought or built the property for, this figure is then depreciated down to a residual land value over a period of 30 to 50 years.

This method of accounting ensures that there is no significant variance to the annual accounts caused by swings in property values and is also a more cost-effective approach negating the requirement for annual asset valuations. However, whilst this method may be appropriate for other items of a balance sheet, where there is a limited usable life and little to no secondary market, real estate does not operate in the same manner. Therefore, in the majority of instances the figures which corporates are providing in their financial statements bear no reflection to what the properties are actually worth.

Real estate funds and REITS value their properties at least annually, if not more frequently and account for their properties at Fair Value in accordance with IFRS. Fair Value is recognised as being in line with the IVSC and RICS definitions of Market Value, which estimates the actual price a property would sell for on the market. As a result, funds hold their property on their accounts at a “real value”.

The largest owners of commercial real estate across the world are global corporates. They own a vast number of office, industrial, logistics and retail properties. The value of these properties is in the trillions of dollars, though by accounting for their real estate at cost there is a significant danger that companies are not showing their real value on their balance sheets. The fundamental principles that cost does not equal value is not being considered, nor is the volatile nature of the property market.

The real estate market operates in a cyclical manner, values can change distinctly and by not reflecting this, organisations are at risk of either grossly under or over assessing the worth of their assets. This can be especially true when considering land. Land is a finite resource and amendments to planning policy over time, can result in drastic fluctuations in value. Cities across the globe have changed dramatically over the years. There are numerous examples of industrial sites owned by manufacturing companies across the globe which now have higher and better uses. In these instances corporates could be sitting on real estate with values significantly higher than what is being reported.

A considerable number of companies are publicly listed on stock exchanges and traded for and on behalf of institutional and private investors. The decision to invest in these companies is made based on the information corporates provide, particularly their accounts. When the balance sheet does not reflect the true value of real estate by showing a value either higher or lower, there is a danger that investors are being misled and companies are either over or under valued. It is taken for granted that the audited accounts are accurate but if the real estate is not being considered in line with the market, are they?

CBRE launches Corporate Valuation Services

CBRE launches Corporate Valuation Services

Dominic Burke

Dominic Burke

Director

t. +44 (0)20 7182 2596
e. dominic.burke@cbre.com

Lorraine Howells

Lorraine Howells

Director

t. +44 (0)20 7182 2054
e. lorraine.howells@cbre.com

CBRE has set up a new valuation team solely focused on providing valuations to commercial real estate occupiers.  The team based in London will serve occupiers across their EMEA network and will work with colleagues in the Americas and Asia Pacific to ensure that global portfolios are serviced to the highest standards.  CBRE Valuation & Advisory Services are the largest and most experienced valuation team throughout Europe, with over 600 professional staff in 151 offices across EMEA.

The CBRE Corporate Valuation Services (CVS) team are the only team dedicated to providing a valuation service of real estate assets for corporate occupiers across EMEA.  CBRE recognises that the needs of corporate owners are different to many landlord operators and aim to provide a one-stop service through a team who specialise in understanding the needs of the occupier, safeguarding a consistent standard of valuation methodology and reporting across the network. The CVS team will work with valuation experts in country to ensure that the market dynamics are always accurately reflected. The team are experienced at managing valuations across the globe and will ensure the reports are appropriate for purpose and are provided in a cost-effective manner.

The CVS team provides informed, market facing, independent advice in all real estate sectors across all interests, from one-off valuations to valuations of entire portfolios, including the following:

  • Accounts valuations: both periodic valuations for occupiers and client with bespoke reporting
  • Valuations for Merger & Acquisitions and stock exchange listings
  • Valuations as part of a purchase or sale
  • Valuation and advice in relation to an ongoing asset management initiatives and corporate strategy such as sale and leasebacks
  • Corporate pension fund transfers

Through our Global Workplace Solutions business CBRE are the largest occupier focussed real estate consultant. The CVS team will provide an additional service line to these clients further enhancing the CBRE offering.

“The value of real estate is of fundamental importance to corporate occupiers. It informs key strategic choices, supports investment, and is a foundation of balance sheets and lending.

We are delighted to announce the formation of a dedicated team to support our corporate clients. Based in London, the team operates throughout the world, working with local specialists in over 280 offices, benefiting from a unique understanding of the needs of the world’s most innovative and forward thinking companies”

 

―― Michael Brodtman, Executive Director and Head of CBRE Valuation Advisory Services