Valuation of real estate portfolios according to IFRS: Using fair value for value enhancement
Does your real estate portfolio hide untapped value potential? An assessment based on HGB criteria often shows only a fraction of the actual market value. Evaluating real estate portfolios according to IFRS can uncover these hidden reserves and enhance your financial metrics by up to 15%.
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The topic briefly and concisely
The valuation of real estate portfolios according to IFRS replaces acquisition costs with the fair value, thereby providing transparency about hidden reserves.
IAS 40 provides an option between the fair value model (value changes in P&L) and the cost model (carried at acquisition cost) for investment property.
IFRS 13 defines the three permissible valuation methods: the market approach, income approach, and cost approach for determining Fair Value.
The transition to International Financial Reporting Standards (IFRS) presents many real estate owners with challenges. However, it offers a tremendous opportunity: shifting away from purely cost-based approaches towards a dynamic fair value assessment. This change makes the actual market value of your portfolio transparent and significantly strengthens the confidence of banks and investors. This article guides you through key IFRS regulations such as IAS 40 and IFRS 13, demonstrates the recognised valuation methods, and explains how to leverage the new requirements to your advantage. Learn how an accurate, data-driven valuation forms the foundation for strategic decisions and optimised capital raising.
Understanding IFRS Fundamentals: Fair Value as a Central Value Driver
The fundamental shift in the valuation of real estate portfolios according to IFRS lies in the concept of Fair Value. Unlike in HGB, where acquisition costs dominate, IFRS requires valuation at fair value. This value reflects the price that would be achieved in a sale between knowledgeable, willing, and independent business partners on the valuation date. For capital market-oriented companies, this approach has been mandatory since 2005 and increases transparency for investors and banks. A precise fair value determination is therefore not just a compliance issue but a strategic tool for disclosing hidden reserves. Correct application of the standards is crucial for setting the course for subsequent valuation.
IAS 40: Choosing the Right Valuation Model for Investment Property
IAS 40 prescribes the rules for subsequent measurement of investment properties (Investment Properties). Companies have a choice here between two models, which must be applied consistently across the entire portfolio. The decision directly impacts the balance sheet and the profit and loss statement. A switch from the fair value model back to the cost model is considered highly unlikely as it does not improve presentation. The right choice depends on corporate strategy and the expectations of investors.
Here is an overview of the two options:
Fair-Value Model: The property is regularly reassessed at market value. Changes in value are immediately and directly recorded in the profit and loss statement, which can increase volatility but also reveal value gains.
Cost Model: The property is accounted for at acquisition or production costs minus regular depreciation. While the fair value must be disclosed in notes, it does not directly affect the balance sheet values.
The application of the fair value model is a clear commitment to market-oriented evaluation, as outlined by the principles of IAS 40. Next, we will look at the specific procedures allowed for determining this value.
IFRS 13: Three Recognized Methods for Accurate Valuation
IFRS 13 Standard governs how the fair value is determined, allowing for various valuation methods. The choice of method depends on the type of property and the availability of market data. The aim is always to simulate a realistic exit price. Three main methods have been established for valuing real estate portfolios according to IFRS.
These three approaches are crucial:
Market Approach (Vergleichswertverfahren): Here, the prices of recently sold comparable properties are used as a reference. This approach is very objective when there is an active market with sufficient transactions.
Income Approach (Ertragswertverfahren): In this method, the value is derived from anticipated future income (e.g., rent). The Discounted-Cash-Flow method (DCF) in particular is a key tool for valuing entire portfolios.
Cost Approach (Sachwertverfahren): This approach determines the costs that would be incurred in constructing a new building of the property, minus any depreciation for age. It is often used only when no market or income data is available for a property.
The choice and correct application of these methods distinguishes IFRS-compliant valuation significantly from a pure HGB accounting. However, the risk of devaluation lurks even with rising values.
Minimise impairment risks: Recognise impairments under IAS 36
A key aspect of IFRS is the impairment test according to IAS 36. This test must be conducted whenever there are indications of an impairment of an asset. A sudden market decline of more than 10% or a significant deterioration in the rental situation can trigger such a test. The test compares the carrying amount of the property with its recoverable amount (the higher of fair value less costs to sell and value in use). If the carrying amount exceeds this, an impairment loss must be recognised. This is immediately reflected in the profit and loss account. A proactive impairment test for real estate helps to avoid unpleasant surprises at the balance sheet date. Furthermore, the results and assumptions must be made transparent.
Creating transparency: Increasing trust through disclosure obligations
The valuation of property portfolios according to IFRS requires a high degree of transparency. The disclosure obligations under IFRS 13 are extensive and are intended to enable investors to understand the valuation process. This transparency can increase the confidence of capital providers by over 20%. You must not only explain the final values but also detail the path leading to them in the notes to the financial statements.
The key disclosures include:
The valuation methods used (e.g., DCF method).
The significant input factors (e.g., discount rate, vacancy rates).
The classification of the valuation within the three-level fair value hierarchy (Level 1-3).
A sensitivity analysis that shows how the value behaves when assumptions change.
Comprehensive documentation in accordance with IFRS disclosure obligations is essential for an audited balance sheet. Modern technologies can significantly simplify this process.
Harness digitalisation: Accelerate portfolio analysis by 50% using AI
The complexity of IFRS valuation requires a vast amount of data and analysis. Here, digital solutions offer a crucial advantage. AI-powered platforms can analyze market data in real-time, identify comparables, and feed DCF models with thousands of data points. This reduces manual effort by up to 50% and minimizes the risk of human error. Instead of relying on outdated Excel sheets, you utilize dynamic systems. With Auctoa's ImmoGPT, you can address initial questions about your portfolio valuation instantly and for free. For a comprehensive analysis, an Auctoa valuation provides you with a data-driven basis for your IFRS accounting within 48 hours and assists with portfolio stabilization. This way, you not only meet regulatory requirements, but also gain valuable time for strategic decisions.
bewertung-von-immobilienportfolios-nach-ifrs
The valuation of real estate portfolios according to IFRS is far more than an accounting obligation. It is a strategic tool that reveals the true value of your properties and ensures comparability for international investors. Consistent application of the fair value principle uncovers hidden reserves and provides a realistic basis for financing discussions and transaction decisions. Even if implementation seems complex, the benefits of increased transparency and a strengthened market position far outweigh it. Use IFRS valuation as a compass for the success of your real estate portfolio.
Additional useful links
The official page of IFRS provides detailed information on IFRS 13, which governs Fair Value measurement.
On the IFRS website, you will find the IAS 40 standard related to accounting for investment properties.
The Federal Statistical Office (Destatis) provides comprehensive data on construction prices and the real estate price index in Germany.
The Deutsche Bundesbank offers a detailed indicator system for the German residential real estate market.
The IDW Publishing offers the IDW S 10 Standard, which establishes principles for real estate valuation.
The RICS provides the German translation of their "Red Book 2017" for real estate valuation.
The website of the Accounting Standards Committee of Germany (DRSC) offers insights into the development and application of accounting standards in Germany.
A brochure from KPMG highlights the specifics of Real Estate Audits under IFRS and HGB.
FAQ
Which valuation model under IAS 40 is more suitable for my portfolio?
The fair value model is suitable for companies that want to show the true market value of their portfolio and realise value increases, even if this leads to more volatility in the profit and loss account. The cost model is more conservative and simpler, but it conceals hidden reserves. The choice depends on your corporate strategy and the requirements of your stakeholders.
Can I apply different IFRS valuation methods to different properties in my portfolio?
The valuation model (Fair Value or Cost) according to IAS 40 must be consistently chosen for the entire portfolio of investment properties. However, the specific valuation method (e.g., income approach or comparison approach) according to IFRS 13 can and should vary depending on the property and available data, to determine the most appropriate value.
What happens if the fair value of a property cannot be reliably determined?
In the very rare exceptional cases where a fair value cannot be reliably determined (e.g., when initially valuing an asset in a completely inactive market), IAS 40 requires the application of the cost model. Nevertheless, the fair value must be estimated and disclosed in the notes.
How does Auctoa specifically assist me in valuing real estate portfolios according to IFRS?
Auctoa supports you with an AI-powered platform that analyses large volumes of market data to deliver precise and rapid assessments. We provide you with a data-driven foundation for your fair value determination according to IFRS 13, create documentation for disclosure, and significantly accelerate the entire process. Contact us for a non-binding initial consultation.
