NAV change will end an ‘apples and oranges’ comparison

COMMENT In the 16 years since the development of the EPRA NAV and the NNNAV, the listed real estate industry has rapidly transformed. Modernised business models, diversified offerings and product innovation has led to phenomenal performance for property, and particularly for listed real estate, as an asset class. Yet for all the progress and change, in 16 years the two financial reporting metrics never evolved. So we have changed them, to make sure they better reflect how the industry has advanced, and from 1 January 2020 we will welcome the new EPRA NAV metrics, namely EPRA NRV, EPRA NTA and EPRA NDV standards. Why the change? The status quo represents a ­theoretical discrepancy between the pace at which the industry is changing and the metrics in place to help investors understand these businesses. In recent years, as the pace of progress has quickened, the discrepancy has become a very practical problem – in particular, when reporting the EPRA NAV. The result is an often unnoticed, but significant lack of clarity between the listed property companies that report against the outgoing EPRA NAV and NNNAV and the businesses trying to understand them as an investment proposition. To provide the proper context, it is useful to borrow an analogy that one bank, which will remain unnamed, used to address the changes to the reporting requirements to their clients. In the client communication, it said that the EPRA NAV and, to a lesser extent, the NNNAV were often the first port of call when comparing “apples” with “oranges”. Herein lies the problem. Investors shouldn’t have to compare apples with oranges, at all. The evolution of the listed sector This wasn’t always an issue. When the listed sector was smaller, REIT regimes less common and business models less sophisticated, the EPRA NAV and NNNAV served as a useful comparison tool. As business models have diversified and grown in complexity, property companies have developed the need to use different financial mechanisms from one another, such as intangibles or goodwill, to represent M&A growth and outsourced management services, among other things. In the modern industry, whether financial mechanisms are applicable or not is dependent on business model, operational geography and sector. Some businesses need to use and then report on intangibles, but not goodwill, and vice versa. The old system incorporated many of these different facets into just two reporting metrics. The result was that two businesses using totally different financial mechanisms were required to report under the same standard. It produced a completely consistent set of reports that quantify entirely different things: apples and oranges. See also: Changing values: The how and why of EPRA’s replacements for NAV Under the new reporting regime, the metrics for apples and oranges are effectively separated. The three new reporting frameworks provide investors with a set of newly defined scenarios, producing a clearer view of how the individual companies operate and how they can be compared with one another. Now investors will be able to compare apples with apples and oranges with oranges through a completely separate lens. To lay any fears to rest, much of the information which underlies the old NAV metrics are carried over to the new ones, only further adjusted and refined. So, for analysts and reporters, there is actually very little extra work to do. It is largely the same information presented in a more user-friendly way, and which better reflects how the industry has evolved. The new standards are, if anything, designed to avoid confusion and make the sector more accessible to a wider range of investors, like insurers and pension funds. We should welcome them with open arms. Hassan Sabir is finance and sustainability director at the European Public Real Estate Association