Maximise transparency: Accurate accounting of real estate funds according to German Commercial Code (HGB)
Ever wondered how the value of real estate fund shares really comes about? The accounting of real estate funds according to the German Commercial Code (HGB) follows strict, conservative rules that often lead to hidden reserves.
Chat with ImmoGPT for free now.
With access to Google, BORIS, and Deep Research.
The topic briefly and concisely
The accounting of real estate funds according to the HGB is carried out at acquisition cost, which leads to stable book values and hidden reserves.
In contrast to IFRS, which focuses on market values (fair value), the HGB prioritises creditor protection through conservative valuation.
For investors, the appendix and the management report are crucial in understanding the true value of the fund assets, despite the rigid HGB rules.
The valuation of real estate assets within a fund is often a black box for investors. While international standards rely on market values, the German Commercial Code (HGB) prescribes a more cautious approach. This article highlights the specific rules for accounting real estate funds according to HGB, explains the dominant acquisition cost principle, and shows the significant differences from IFRS valuation. You will receive data-driven insights to assess your investment's performance comprehensively and understand the impact on distributions and asset representation with over 10% accuracy.
Fundamentals of HGB Accounting for Real Estate Funds
The accounting of real estate funds according to HGB is based on the German Commercial Code and the Capital Investment Code (KAGB). Open-ended real estate funds in Germany are managed exclusively as special assets according to § 91 para. 3 KAGB. The overriding principle is creditor protection, which prescribes cautious and conservative valuation. At the heart of this is the acquisition cost principle, which requires valuation at historical cost. This protects against the reporting of short-term, unrealised gains and ensures a stable balance sheet. For corporations, the structural requirements in §§ 266 to 274a HGB are clearly defined. These solid but inflexible rules form the foundation for the valuation of fund assets worth many billions of euros. Strict compliance with these standards is crucial for transparency towards investors.
The application of these principles often leads to the formation of hidden reserves, as increases in property values remain invisible. An HGB valuation of land focuses on permanence rather than speculative market values. This creates a reliable, albeit restrained, basis for investment decisions. Next, the strict acquisition cost principle will be analysed in more detail.
The principle of acquisition cost as a core valuation concept
The cost principle is anchored in § 253 para. 1 HGB and forms the basis of valuation. The acquisition costs include the purchase price of the property plus all ancillary costs such as property transfer tax, notary fees, and brokerage fees, which often account for 5-10% of the purchase price. From these costs, scheduled, usage-based depreciation is deducted over the assumed useful life of, for example, 30 to 50 years. This causes the book value of the property to decrease annually, regardless of the actual market development. A revaluation beyond the original acquisition costs is strictly prohibited. This approach ensures a conservative representation of assets and prevents the reporting of profits before they are realised through a sale. A thorough understanding of this method is essential for investors, as detailed in the cost model for property valuation.
An exception to this principle is the lower of cost or market principle, which applies in the case of permanent impairments. If the current market value of a property is expected to be permanently below its book value, an unscheduled depreciation must be made. This can occur, for example, in the event of a permanent deterioration in location by more than 20%. The valuation in special assets is subject to special rules.
Specifics in the Valuation of Real Estate in Special Assets
Real estate in open-ended funds is considered as special assets, which are legally separated from the assets of the capital management company (KVG). The valuation of these properties must be conducted by external, independent experts at least every 12 months. These experts determine the market value, which, however, serves only a supervisory function. For accounting under the German Commercial Code (HGB), the book value according to acquisition costs or the lower fair value remains relevant. This means that even if the market value has increased by 30%, the lower book value remains on the balance sheet.
The criteria for valuation by the experts are strict and include, among other factors:
Quality and condition of the properties
Location analysis and market environment
Current rental income and occupancy rate (often over 95% for top funds)
Remaining terms of lease agreements, which average 5-7 years
General economic efficiency and maintenance backlog
This detailed examination ensures the quality of the assets, even if it is not directly reflected in the HGB balance sheet. The valuation of operating properties in accordance with HGB follows similar stringent guidelines. The fundamental differences to international accounting standards become clear in the next section.
HGB versus IFRS: Two contrasting valuation philosophies
The German HGB accounting and the International Financial Reporting Standards (IFRS) pursue fundamentally different objectives. While the HGB prioritizes creditor protection through cautious valuation, the IFRS aim to provide decision-relevant information for investors. The biggest difference lies in the valuation of investment properties. According to IFRS (IAS 40), these can be recorded at fair value (market value), with changes in value directly impacting the profit and loss statement. An increase in market value of 5% results in an immediate profit recognition under IFRS.
Here are the key differences summarized:
Measurement basis: HGB uses carried acquisition cost, IFRS allows fair value.
Profit recognition: Profits are realized only upon sale under HGB, whereas IFRS allows pure value increases to elevate profits.
Hidden reserves: The HGB systematically leads to hidden reserves, which are dissolved under IFRS accounting.
Depreciation: Scheduled depreciation is omitted with fair value assessment under IFRS.
Objective: HGB serves creditor protection, IFRS serves investor protection through a "True and Fair View."
These differences are significant, as highlighted by the contribution to the difference between IFRS and HGB. The disclosure obligations are intended to provide greater clarity here.
Transparency through disclosure requirements in the appendix and management report
To offset the drawbacks of the rigid HGB valuation, there are extensive disclosure requirements. The notes to the annual financial statement must provide a detailed explanation of the accounting and valuation methods applied. Here, fund companies must, for example, specify the periods over which properties are depreciated, which can explain write-downs of over 100 million euros per year for large funds. Furthermore, the management report must convey a realistic assessment of the asset, financial, and earnings situation. It often contains information on the market values of properties that are not visible in the balance sheet itself. This enables investors to at least estimate the hidden reserves. Compliance with these disclosure requirements for property valuations is crucial for BaFin-compliant reporting. This information has a direct impact on investors.
Consequences for Investors: Hidden Reserves and Distribution Policy
For you as an investor, the accounting of real estate funds according to HGB means one thing above all: stability. The reported values fluctuate significantly less than with a pure market valuation. This leads to more stable share prices, as increases in value are only realized and reinvested or distributed upon sale. A fund can thus achieve capital gains of over 50% on individual assets over the years, which then support distributions. The downside is less transparency about the true value of the portfolio. The hidden reserves can be considerable, which may make the fund appear undervalued. To clarify this, an analysis of the management reports and the annual appraisals is essential. If you have uncertainties about the valuation of your own properties, an initial assessment can help. The Auctoa ImmoGPT chat offers you a data-driven analysis in less than 60 seconds.
bilanzierung-von-immobilienfonds-hgb
The accounting of real estate funds according to HGB creates a stable and predictable environment for investors, based on the proven principle of prudence. Valuation at cost leads to the creation of significant hidden reserves, which can obscure the true value of the fund's assets. An investor who only looks at the balance sheet may underestimate the potential of their investment by 20-30%. Therefore, for a well-founded decision, it is essential to analyse the information from the notes and the management report and to understand the differences from the market-oriented IFRS valuation. In the end, a well-founded analysis ensures the necessary security in dealing with real estate investments.
Additional useful links
The IDW provides a statement on the accounting of companies in the real estate industry (IDW ERS BFA 2 n.F.).
The Deutsche Bundesbank publishes financial stability reports that contain analyses and assessments regarding the stability of the German financial system.
The Statistische Bundesamt (Destatis) provides information on construction prices and real estate price indices in Germany.
The Bundesfinanzministerium provides information about the investment tax reform.
The electronic Bundesanzeiger is the official platform for company publications and announcements.
A brochure by KPMG covers accounting for real estate companies according to IFRS and HGB.
The Bankenverband offers information on the financing of affordable housing, including challenges and approaches to solutions.
FAQ
What role does the lower of cost or market principle play in the accounting of real estate funds?
The lower of cost or market principle is an exception to the cost principle. If the market value of a property is expected to remain permanently below its book value, an impairment loss must be recorded to lower it to this value. This ensures that there are no overvalued assets on the balance sheet.
Are the rules for open and closed real estate funds identical under the German Commercial Code?
No. Open-ended funds are subject to the strict rules of the KAGB as special assets. Closed-end funds, often structured as investment limited partnerships (InvKG), have somewhat more flexible regulations, although the principles of the HGB also apply to them. The regulation for open-ended funds is markedly stricter to protect the general investor base.
How does HGB accounting affect a fund's distributions?
The distributions mainly consist of rental income and realised sales profits. Since increases in value according to the HGB only become effective upon sale, management can strategically time sales to stabilise distributions over the years, even if rental income fluctuates.
Can I, as an investor, determine the true value of my fund shares?
An exact determination is difficult, but a good approximation is possible. Analyse the fund's annual and semi-annual report. In the management report, pay attention to the market values determined by experts and compare these with the book values in the balance sheet to estimate the amount of hidden reserves.
What costs are included in the acquisition costs of a property in the fund?
The acquisition costs include not only the pure purchase price but also all ancillary acquisition costs. These typically include the real estate transfer tax (depending on the federal state, 3.5% to 6.5%), notary and land registry fees (approx. 1.5% - 2.0%), as well as any broker commissions.
What happens when a property in the fund is revalued?
According to the German Commercial Code (HGB), an appreciation beyond the original acquisition cost (value recovery) is prohibited. An exception exists if an extraordinary depreciation was made in previous years. If the reason for this depreciation no longer exists, the value must be reassigned up to a maximum of the continued acquisition costs.
