The Reliability of Investment Property Fair Values Under IFRS

Abstract

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 reported using a fair value approach. This paper examines the perception of fair value estimates for many companies’ main asset: investment properties. For that purpose we investigate the association between the net asset values of European listed property companies and their market prices. We find that net asset value usually departs from the market capitalization of European property companies. We think that those deviations are a result of insufficient accuracy 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.