EPRA strives for transparency

Europe represents over 45%[1] of the high quality real estate asset class of the developed economies[2]. The weakening of the economy has also exerted pressure on property values, as rents and occupancy rates declined due to downsizing by commercial tenants. The European sector traded at its deepest discount to published Net Asset Value (NAV) level of 46%, amid concerns. The fall in NAVs for the companies presented a concern as debt covenants were stretched in addition to falling performance. With the debt market having closed its door for commercial property loans, European property majors, led by UK stocks, commenced a series of heavily discounted rights and equity issuesWorkspace was the first when it announced late January that it would offer 5 for 1 rights issue at 10 pence, which represented a discount of nearly 70% to share price. A day later Helical Bar announced its GBP28 million share placement. The large caps followed in February, Hammerson, British Land and Land Securities all announcing right issues within a ten day period.  Subsequently, SEGRO, Great Portland Estates and Shaftesbury all successfully raised equity through rights issues in the following four months. Constituents of the EPRA Europe Developed index have successfully raised EUR 6.6 billon year-to-date.  The sector has recovered remarkably since the low point of February and trading at par to published NAV figures as of end of August 2009.

Confidence through Transparency 

NAVs are an important investment metric for real estate investors, and comparability across borders is increasingly important. Unfortunately quality of reporting varies considerably in Europe, and EPRA’s Best Practice Recommendations aim to raise the bar. For those companies not using EPRA NAV and NNNAV, the boat is sailing with a common purpose.Investors, analysts and company management have always been conscious of the unique characteristics of property investment.  For example, real estate investment is one of the few industries that have a dedicated International Financial Reporting Standard. IAS 40 is focused specifically on the business of real estate investment, and provides a fair-value driven accounting convention which is generally viewed as enabling investors to understand property performance based on the value enhancement/destruction caused by management actions, and the changing market values for rents and valuation yields. There is a fundamental and important link between rental income and the fair value of investment property. In turn, the fair value of investment property is a significant factor in measuring the “net asset value” (NAV) of companies that own and operate portfolios of investment property, and NAV is a significant factor used to price the securities of these companies. Over the course of time, industry participants have developed and used supplemental industry metrics to value the common shares of companies that own and operate investment property.  These metrics include Funds from Operation (FFO), EPRA Earnings, EPRA Net Asset Value (EPRA NAV), EPRA Triple Net NAV (EPRA NNNAV) and others. These metrics are viewed by users of the financial statements as being reflective of the true operating results of a real estate investment company, excluding non-cash items, like for example unrealised valuation changes and depreciation. But let’s not kid ourselves; we are still a long way away from a European or global market with transparency and comparability between companies and countries with respect to these important industry metrics. One of EPRA’s key roles is to continue to develop and promote accepted best practice standards so that European property companies collectively become more competitive on the global markets. Individual ‘best in class’ companies are helpful in pushing the boundaries and leading the industry forward, but we must also encourage general improvement in reporting standards at all levels. As an initial step towards a wider acceptance of EPRA NAVs, EPRA introduced in May its monthly published NAV report. The report focuses on the constituents of the FTSE EPRA/NAREIT Europe Index and compares month end stock prices versus the related published NAV figures. Discounts to NAVs of property companies have long been recognized by the industry, and this research provides a historical account of stock prices discounts/premiums to underlying published NAV across Europe over a period of 20 years. In the long term, we aim to achieve broad acceptance of these key ‘EPRA’ metrics amongst the EPRA membership and the constituents of the FTSE EPRA/NAREIT Europe Index.

EPRA Published NAV report

Looking at the latest data (to end August 2009), the FTSE EPRA/NAREIT Developed Europe Index currently trades at par to published NAV (figure 1).  Of course, as time moves away from the latest set of published numbers, the numbers can become distorted - particularly in the current market. For example, we record “par” in September 2009, however this compared September stock prices versus second quarter NAVs in many individual company cases – obviously not accounting for changes in Q3 2009. Subsequently, the figure indicated in the graph will be adjusted retrospectively when companies publish Q3 in the coming months. On average, European property companies traded at a 13% discount to published NAVs since 1989. As of end of August, almost all European countries traded at discounts to published NAVs with the exception of the UK. France and Belgium being the two countries which are the least discounted (11% and 2% respectively), whereas Austria and Norway are most heavily discounted (51% and 68% respectively).