Real Estate Investment Funds: Financial reporting - Alfi

property valuation
1. What are acceptable
valuation methods for
investment property?
a. The actual cost of a recent acquisition.
b. Estimations made based on the cost of
comparable transactions in a similar location
and condition, often using a unitised method
(e.g. value per square meter), or of a dissimilar
property adjusted to reflect the differences.
c. Discounted cash flow of future income
and expenses.
d. Multiples of annual rental income (rental yields).
e. Any other method recognised by applicable
valuation standards, e.g. depreciated
replacement cost, profits method, fair value
at completion less costs to complete,
(applicable to properties under development).
f. When determining the fair value of a
property, lease adjustments, such as
incentives, rent guarantees and insurance
cover are usually taken into account.
Attention should be paid to avoid double
counting of such effects in the fair value of
the property, when such effects are reflected
as separate items on the balance sheet.
2. What are the
generally accepted
frameworks for
determining fair value
for investment
properties?
a. CSSF Circular 91/75, and in other cases
common and best practice (see Chapter VI.2),
dictates that investment properties must be
valued at least on an annual basis by an
external valuer. There are no detailed
guidelines specifying how this should be
done; valuation rules are those as stated in
the Fund Documentation. Best practice is to
follow recognised property valuation
standards such as IVSC/RICS /TEGOVA.
If the financial statements are prepared in
accordance with IFRS, then the valuation
methodology should also comply with
IAS 40 (Investment Property). IAS 40 regards
current prices in an active market for similar
property in the same location and condition
and subject to similar lease and other
contracts as the best evidence of fair value.
In the absence of current prices in an active
market, the standard considers information
from a variety of sources including
discounted cash flow projections based on
reliable estimates of future cash flows.
b. INREV Guidelines 2008 (in the following
"INREV") provide further details on
frameworks for performing property
valuations for unlisted funds with the EPRA
Best Practices Recommendations on
Reporting of October 2010 providing
guidance for listed funds.
c. For open ended funds, independent and
regular valuation of the properties is
particularly important as this ensures that
subscriptions and redemptions of units/shares
are carried out based on a Fund NAV directly
linked to the underlying property value.
3. What is understood
by the term ‘Fair Value’
for investment property
and is this always the
same as ‘Market Value’
as described in various
property valuation
standards?
a. In the context of real estate, Market Value
generally refers to the valuer’s opinion of the
best price that could be obtained in the open
market on an arms-length basis at a specific
date, assuming a willing buyer and a willing
seller, and assuming marketing has already
taken place e.g. special interests and/or
operational value to the business are not
taken into account.
b. Fair Value is the net present value of expected
cash proceeds taken from the market value
defined in Chapter I.3.a above, which is
expected to be received from the disposal of a
property under normal market conditions.
This excludes transaction costs normally
borne by a potential buyer from the appraised
market value. In addition, costs which may be
incurred by the seller on disposal of the
property are not taken into account in both
the fair value or in the market value.
c. Under IFRS the determination of fair value
generally does not take account of the method
of disposal (i.e. always assumes that the
property is sold as an asset deal from the
company that owns it). Essentially, it is the value
that the investors in the fund can expect to
recover from the sale of a property, as estimated
at the date of the financial statements.
d. Although LuxGAAP generally follows IFRS
rules, under LuxGAAP and INREV
guidance, the method of disposal in certain
circumstances could possibly be taken into
account, e.g. the effect of a possible sale of
shares of a property vehicle, rather than a
property, reducing the actual transfer tax
and/or purchasers costs to be paid upon sale
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