Accounting - transparency instead of hidden reserves
IMMOFINANZ accounting practices are based on International Financial Reporting Standards (IFRS/IAS), which are also followed by most major listed corporations. Up to 30 April 2005, the IMMOFINANZ property portfolio was valued according to the IAS cost model. Under this model, properties were valued at cost less ordinary depreciation and any necessary deductions for impairment. The management of IMMOFINANZ decided to replace this accounting method with the IAS 40 fair value model, which is also recommended by the EPRA as a Best Practices Policy, effective on 31 January 2006. As a result, the current and previous year financial statements were adjusted to reflect the use of this model. Properties are now shown at fair value, and the increase in value is also included on the balance sheet and income statement.
The fair value of a property is determined on the basis of two components – rental income and the normal returns for property investments on the particular submarket. An increase in fair value can result from higher rental income as well as declining returns.
The apartment house market in Vienna currently presents a similar picture. In recent years IMMOFINANZ has compiled a highly attractive portfolio of residential buildings at good locations throughout Vienna. The original plans indicated that these properties would be held and managed as long-term projects, but the development of the market has been even better than expected in recent years – and for that reason, IMMOFINANZ decided to take advantage of the extraordinary price level and sell off numerous objects at returns that would have been impossible to forecast at the start of these investments.
EXAMPLE: A property generates annual rental income of EUR 1 million, and the market return is 8%. That means the rental income represents 8% of the fair value of the prop erty. Therefore, the fair value equals EUR 12.5 million. In the following year, rental income increases 2% to EUR 1.02 million but the market return declines to 7.5%. That means the rental income represents 7.5% of the fair value of the property, and the fair value equals EUR 13.6 million.
Since IMMOFINANZ only concludes indexed leases that call for an annual adjustment in rents based on the development of inflation, this leads to an “automatic” increase in rental income that, in turn, also increases the fair value of the properties. When market developments are favourable, as is the case on the Austrian housing market, and new rental agreements can be concluded at higher prices, this effect will be intensified.
The development of market returns in recent years has also been excellent. The lower returns on alternative investments (in particular, fixed-interest securities) and a decrease in risk on many markets have lead to a clear drop in market returns. For example, the returns on fully rented office properties at prime locations in Vien na have fallen to 5.4% and also declined for residential objects at first class locations, which means the purcha se prices have increased.
The fair value of a property is determined on the basis of two components – rental income and the normal returns for property investments on the particular submarket. An increase in fair value can result from higher rental income as well as declining returns.
The apartment house market in Vienna currently presents a similar picture. In recent years IMMOFINANZ has compiled a highly attractive portfolio of residential buildings at good locations throughout Vienna. The original plans indicated that these properties would be held and managed as long-term projects, but the development of the market has been even better than expected in recent years – and for that reason, IMMOFINANZ decided to take advantage of the extraordinary price level and sell off numerous objects at returns that would have been impossible to forecast at the start of these investments.
EXAMPLE: A property generates annual rental income of EUR 1 million, and the market return is 8%. That means the rental income represents 8% of the fair value of the prop erty. Therefore, the fair value equals EUR 12.5 million. In the following year, rental income increases 2% to EUR 1.02 million but the market return declines to 7.5%. That means the rental income represents 7.5% of the fair value of the property, and the fair value equals EUR 13.6 million.
Since IMMOFINANZ only concludes indexed leases that call for an annual adjustment in rents based on the development of inflation, this leads to an “automatic” increase in rental income that, in turn, also increases the fair value of the properties. When market developments are favourable, as is the case on the Austrian housing market, and new rental agreements can be concluded at higher prices, this effect will be intensified.
The development of market returns in recent years has also been excellent. The lower returns on alternative investments (in particular, fixed-interest securities) and a decrease in risk on many markets have lead to a clear drop in market returns. For example, the returns on fully rented office properties at prime locations in Vien na have fallen to 5.4% and also declined for residential objects at first class locations, which means the purcha se prices have increased.
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