EPRA earnings and the requirement for debt valuation
Recent changes in the EPRA NAV measures have led many CRE borrowers to include a valuation on their debt portfolios. The following commentary summarises the changes, and how Chatham is assisting clients in this valuation and reporting process.
What has changed?
In late 2019, the European Public Real Estate Association (EPRA) announced modifications to its BPR (Best Practice Recommendations) which meant changes in the measurement of NAV – a key KPI for the industry. These changes are designed “to improve transparency, comparability and the relevance of financial reporting in the listed real estate… The changes will level the playing field between Non-REITs and REITs and ensure the EPRA BPR remain aligned with the International Financial Reporting Standards (IFRS) developments”*.
Going forward, those publishing EPRA metrics will need to replace the former NAV measurements (EPRA NAV and EPRA NNNAV) with three alternatives:
- EPRA Net Reinstatement Value (NRV) – assumes entities never sell assets and represents the value to rebuild the entity
- EPRA Net Tangible Assets (NTA) – assumes entities buy and sell assets
- EPRA Net Disposal Value (NDV) – shows shareholders’ value under a disposal scenario
These EPRA sets of metrics make adjustments to the NAV, per the IFRS statements, to provide information on the fair value of the assets and liabilities of a real estate company under different investment scenarios. Under the BPR, all three must be reported.
What does this mean for real estate investors?
These new measures mean that investors are now required to measure the fair value of financial instruments, including loans and borrowings held at amortised cost under IFRS to calculate the NDV. The objective of this fair value measurement is to estimate an exit price from the perspective of a market participant that holds the asset or owes the liability.
Such a calculation should consider changes in the risk-free rate, debt capital markets, and the risk associated with the underlying real estate asset.
Chatham’s Independent Debt Valuation service
At Chatham, we are independent debt valuation experts, with a proven and auditable methodology adopted by many of our real estate clients. We perform independent debt valuations on over 2,200 loans for 190+ funds globally. Our service can be tailored to the reporting outputs required in each unique situation.
We would be delighted to discuss how you are approaching this debt valuation requirement, and how Chatham’s expertise in this area might be beneficial.
Contact Chatham's valuations team
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The information presented in this report represents average credit spread conclusions segregated by property type and grouped by LTV for the quarter ending September 30, 2020.
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