The reliability of investment property fair values under IFRS

Purpose – The valuation of property companies and fair value accounting for investment properties under IFRS are closely affiliated with each other. This is because property companies are commonly valued using net asset value as a valuation technique. The term net asset value represents the fair value of a property company's assets less its liabilities and therefore can easily be determined, as under IFRS investment property is often reported using a fair value approach. The purpose of this paper is to examine the perception of fair value estimates for many companies' main asset: investment properties. With this it contributes to the stream of real estate finance literature that investigates net asset value deviations from property companies' share prices and to the stream of accounting literature that investigates fair value accounting. Design/methodology/approach – The association between the net asset values of European listed property companies and their market prices are investigated. Observed deviations are related to a wide set of variables using panel (unbalanced) OLS‐regressions. Findings – It is found that net asset value usually departs from the market capitalization of European property companies. It is also found that those deviations are a result of insufficient reliability of fair value estimates of investment properties because of the limitations of appraisals, the diversity of applied approaches in appraising investment properties and the reliability problem for mark‐to‐model approaches usually applied in determining the fair value of investment properties. Originality/value – This parameter has not been considered before in previous literature.