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Proposed changes to international accountancy rules on leased assets could have a detrimental effect on transparency in the property sector, the European Public Real Estate Association (EPRA) has warned.

Under the proposals, two fundamental sources of information for investors - property values and rental income figures - would be removed from the balance sheets of listed real estate companies. This would result in a significant reduction in the usefulness of property company accounts, Epra said.

The International Accountancy Standards Board (IASB), the body responsible for International Accounting Standards, wants to rewrite current accountancy arrangements for all leased assets, whether that be machinery, aircraft or property and instead record these in a similar way to a bank loan, with rental obligations during the remaining period of the contract shown as a liability. If lessors of ‘bricks and mortar’ investment property are included in these changes, then analysts and investors will no longer be able to directly identify the value of a property portfolio or the rental income that it generates from the financial statements .

Gareth Lewis, Epra director of finance, said: 'The current standard for investment property accounting (IAS 40) is well supported by the industry. It shows a property’s value on the balance sheet and full rental income in the profit and loss account. These two metrics (market value and rent) are fundamental
to the way property investment businesses are both managed and analysed by the market, removing them would have damaging consequences for investors and preparers.'

Harm Meijer, real estate investment analyst at JP Morgan in London said: 'The accounting change to represent investment property as a financial and nonfinancial asset is not welcome. My biggest worry is that the transparency in the sector will decrease significantly. Real estate is about investments one can see, one can touch, and it should stay that way. In addition, there should always be a clear link between the language the valuers and agents speak (rents and property value) and how it is presented on the balance sheet. In essence, it is overcomplicating a sector that should be a simple and straight forward investment class.'

Peter van Rossum, CFO of Paris-based Unibail Rodamco, Europe's largest listed property company, and chairman of the Epra Reporting and Accounting Committee said: 'Real estate is fundamentally different from other leased assets. It generally does not depreciate and has no finite life. To split the value of an asset in two - rents receivable and a residual value - is meaningless. Furthermore, the concept to report rental income as an interest credit in the income statement is far removed from the reality of our business activities. Indeed, we believe this would be very hard to explain to investors and
potentially misleading. Our concerns also extend to the impact the rules have on lessees, who are now much more likely to look for short-term leases to limit the impact on their accounts, thereby introducing much more price volatility in a sector that is otherwise characterised by stable, predictable, long-term secure and indexed cash flows.'