EPRA, NAREIT and APREA have played a central role in the improvement of transparency in the listed sector although challenges remain in many areas. Richard Lowe reports
The ongoing drive to improve transparency in the non-listed real estate sector has received much in the way of coverage. And rightly so - much work has been done and challenges remain. However, with the level of attention bestowed upon the issue, it is easy to forget about the listed arena and how quality of reporting is developing here.
In contrast to the unlisted market, listed real estate companies are often subject to strict requirements, quality of reporting among them. But there is huge inconsistency between regions and countries which, more often than not, is driven by historical and cultural differences.
Europe as a whole has improved significantly but is still beset with inconsistency, with western Europe in the main boasting higher standards than countries in southern Europe. Asia is home to some of the world's worst performing major markets (in terms of reporting) but Australia is arguably setting the current global benchmark. The US has also made huge improvements and is always vying for the world's top spot.
The three associations for listed real estate, the European Public Real Estate Association (EPRA), the Asian Public Real Estate Association (APREA) and the North American Association of Real Estate Investment Trusts (NAREIT), have been at the forefront of improving reporting standards in their respective regions. But there are other factors driving improvements, not least perceptions that fuller and more transparent disclosure might well attract more overseas capital.
For example, Patrick Sumner, head of property equities at Henderson Global Investors, who remembers that Europe was "pretty poor 10 years ago", attributes the improvements across the continent to two factors.
"One, EPRA came along and introduced common standards of best practice and everybody started to realise there was some sense in that.
"Secondly, the more they were in touch with foreign investors, the more they thought it was worthwhile providing something in addition to the basic minimum. And so it has improved dramatically."
EPRA's director of reporting practices, Hans Bruggink, agrees. EPRA is continually endeavouring to improve disclosure across Europe, but Bruggink believes the increasing weight of cross-border capital chasing listed property is the biggest stimulus for change.
The current investment climate might not be conducive to making such a point, Bruggink admits, but he says: "What we have seen over time is that indirect investment in real estate is really becoming a part of every portfolio. In the past, of course, institutional investors like pension funds and insurance companies had their bonds, their fixed income and their shares. But right now the notion is that in a good portfolio 10-15% should be invested in real estate.
"The real estate industry in itself now has a very significant value in the total listed capitalisation of all companies. That means, as a sector, it is on the map right now."
Despite admitting that it has never been proven, Bruggink hypothesises that the more transparent a listed property company's disclosure, the more liquidity it effectively enjoys on the stock exchange.
"Today, the more transparent the information is, the more shareholders consider the company as a buying target, because people can understand what is happening."
Not disclosing information is "a no-go these days", he explains. "In the old days no news meant the company was just going on; no information was not an alarm trigger in the 1960s. Right now, no news is a sell indication for an institutional investor."
Bruggink believes western Europe "stands out favourably in terms of operability and IFRS application" compared with the majority of Asian countries. But within Europe itself, he admits that southern countries, including Spain, Italy and Greece, are "rather hesitant to disclose everything". One reason he suggests is that many companies in those countries can be partly listed.
"Whatever the reason, there is a difference between the western European companies, with the UK real estate companies doing the best job of in terms of reporting, followed by the Netherlands and the Scandinavian countries."
But Bruggink does think Europe is moving towards a time when at the least the bigger international companies across the continent will all reach a similar sort of level.
"Smaller companies that have local, national shareholders and maybe only invest in their own country, I think, will probably be less transparent and detailed. But as companies become more internationally orientated they really will move to a level where they follow best practices and give information that pleases all shareholders and the analysts."
Due to the very detailed generally accepted accounting principles (US-GAAP), Bruggink believes reporting in the US is at the moment more detailed and comparatively technical.
Simon Hedger, director of portfolio management at Principal Global Investors, says the level of disclosure in the US has "picked up enormously".
"From our perspective, it is a relatively mature market and has a dedicated set of investors. They have been pressing for change over time and they are on a path to achieving their end-desirable objective."
The real estate sector in the US is currently ranked second out of all listed industries in the country by the Institutional Shareholder Services (ISS), pipped to the post by utilities.
"Independent analysis has shown in the US that by and large REIT governance and reporting is ranked very high," says Steve Wechsler, president and chief executive at NAREIT.
He cites a number of reasons for this, the first being that many of today's US companies went public in the early or mid-1990s.
"When they went public they made decisions with respect to their governance and reporting that were contemporary decisions - that weren't rooted in the past - and that met market expectations in the 1990s."
Another point Wechsler makes is that these companies went public in the aftermath of a US real estate depression and a wider economic recession.
"There was a great deal of scepticism by investors at that time," he says. "Investors demanded not only quality governance but full disclosure."
Wechsler also cites the filing of supplemental disclosures which "provide a wealth of information for analysts and investors". But perhaps one of the most important points is the fact that listed property companies are subject to the same reporting and disclosure requirements as all other publicly traded companies in the US.
In contrast, Asian listed real estate companies are regulated under a discrete set of regulations. Peter Mitchell, chief executive at APREA, suggests that "one of the positive investor protection aspects" of REITs in Asia, generally, is that they tend to be more closely regulated than other listed companies.
Japan, Singapore and Hong Kong contribute the vast majority of total market capitalisation in the region. The standard of regulation and disclosure requirements set out in these countries is not "cause for concern", says Mitchell. In fact, they are "very much on a par" with the highly regarded Australian disclosure requirements.
But Hedger argues tat there is plenty of room for improvement for many of the Asian markets to aspire to the example set by Australia.
"Australia, with the most mature property securities industry, has over time evolved the best and most transparent reporting procedures and standards. Really the rest of the region needs to aspire to achieve that same level of disclosure.
"What you are finding is that the various other major real estate markets in Asia, such as Japan, Hong Kong and Singapore, are basically striving to get to that point.
"But there is inconsistency at the moment which leads an Australian investor to think there is not enough disclosure where others might be happy from a local perspective."
Mitchell says APREA is not so much attempting to "raise standards" as to "achieve best practice standards across the region".
"We are writing a best practices handbook at the moment which covers such things as financial reporting and market disclosure and market conduct. It is being written by members - not by APREA staff - so it will represent, when it is adopted, the association's view on where the region as a whole needs to go in many areas, including reporting.
"One of the reasons the association was set up was because the region is big and diverse and fragmented. There are varying approaches to best practices and there are different best practice standards.
"Countries differ in terms of the level of maturity and development, so there is a need for the region to move towards a common set of best practice standards across the board."
In Europe, there are still improvements to be made, according to Bruggink. "Improvements to be made could be in the area of having more clear industry metrics - performance metrics that could be derived directly from the financial statements. Right now we have to look at the GAAP reporting and make a number of adjustments in the notes before we can have the metrics that the analysts and users of our information use to get an opinion on the performance of the company."
But certainly there have been recent achievements. Following the implementation of international financial reporting standards (IFRS) across Europe in 2005, there has been a "significant improvement in comparability in financial statements", he says.
Bruggink also believes there has been an improvement in the number of companies using fair value as an accounting policy. Under the IAS 40 standard, companies have the choice of reporting fair value in the notes or adopted as an accounting policy with revaluations included in the income statement.
"We see right now that the vast majority - it is something like 84-85% - of the companies within the EU are using fair market value as an accounting policy right now. There are only a few that only give the share market value in the notes. So, I think that is a significant improvement."
It is recognised by investors that direct valuations can lead to mispricing, and consequently a greater use of fair value is largely welcomed.
"We would like to see consistency of valuation practices," says Hedger. "Even in the US you are still getting a lot of direct valuations and that leads to some mispricing. Whereas in Australia and now the UK, the norm tends to be open market valuations done on a regular basis."
However, the adoption of IFRS has not been a smooth transition. In fact, Sumner says that far from helping make the reporting of property companies more transparent, it has actually had the opposite effect.
"In the attempt to apply common standards across all industries, it has actually made reporting of property company results less transparent than it might have been," he says.
The culprit, it seems, is how the standards deal with unrealised gains in market value, which can distort company profit and loss statements (see box).
Hedger explains that the standards have brought about a need to report two different sets of figures: one that meets the new accounting standards and one that provide investors with a broader picture of what the company is "actually doing at the grass-roots level".
He believes the industry bodies have "set out with the best intentions", his main criticism being that they have not attempted to achieve a consistent approach to reporting with the investor in mind.
"What they don't do is examine effective sectors from an investor perspective. They try to come out with a broad-brush approach which suits everybody. And lots of investors may be happy with that, but if you're a niche investor in a particular sector - like we are for the real estate sector - you are looking for disclosure of certain information that allows you to analyse from your perspective. Your goals are not necessarily catered for under a more broad-brush approach."
Before global listed real estate was attracting the sorts of high levels of capital it is today, it commonly attracted small allocations from balanced equity fund managers.
"They were just comparing real estate with mining stocks or media companies," Hedger explains. "Whereas now you are getting individual niches where they are specifically targeting funds who are becoming a major force.
"So, I think the accounting bodies in the longer term need to look at designing a set of accounting standards from a dedicated investor perspective.
Winning ways - and a note of caution
As part of its programme to encourage improvements in the standards of company reporting among European listed real estate, EPRA holds an annual competition to identify the listed real estate company with the most improved company report.
Last year's Best Annual Report (BAR), the sixth in the series, was awarded to UK company Quintain Estates & Development, which competed with 78 other European property firms for the award.
In 2005 the objective of the award was altered slightly to identify the participant demonstrating the highest consistent relative improvement in the quality of annual reporting as determined by its increase in ranking, rather than the overall best report. The scores of the participants over the last three years are taken into consideration.
According to the jury, Quintain showed over the last three years the best and most consistent improvement in disclosing more in-depth and extensive financial analysis and operational review in its annual report.
For example, sources of funding, key financial ratios, risk management policies, information on initial yield and reversionary yield were disclosed and were shown in more detail in the 2006 report. Furthermore, Quintain disclosed information on the net asset value (NAV) and earnings per share (EPS), while the EPRA NAV was also disclosed.
Quintain's disclosure of information on corporate governance remained very high, although this was something that had been identified for most of the UK award participants. In fact, UK companies made up the largest group of eligible award entrants, representing 32% of total participants; the Netherlands was the second largest group, but only represented 9% of the sample.
Asked why she thought Quintain had won the award, company finance director Rebecca Worthington suggested there had always been "an emphasis on transparency and on endeavouring to produce useful information in a style that is understandable and explains our business well.
"That may not always be the easiest of tasks, because it can be rather complicated given that we have three divisions - an investment division, something called ‘special projects' which has a lot of urban regeneration projects in it, and a fund management division - but we endeavour to try to explain as clearly as possible what we are doing.
"We do that in open words but also in a financial context… like looking at our returns against the IPD benchmark. I think those may have been some of the reasons."
Worthington worries, though, that the growing demand for companies to give more information may not necessarily result in increased transparency and clarity.
"You are constantly being asked for more information and yet simply increasing the volume doesn't necessarily make it easier for readers of accounts to understand," she explains. "These accounts are becoming very thick these days with the sheer volume of information."
Furthermore, Worthington says, adoption of IFRS has been problematic specifically for real estate companies because they "rather distort property statements".
"For example, you have unrealised surpluses on the revaluation of investment properties going through your income statements which very materially distorts from what would be considered an underlying high income statement.
"And so trying to explain to people what is going on in the accounts in a clear way they can understand is a clear challenge."