Understand the challenges of international property measurement and the impact of inconsistent standards on real estate and financial reporting.
The real estate and infrastructure business is becoming increasingly global, making up 70% of global wealth. Since real estate is one of the biggest asset classes and makes up a huge proportion of a company’s balance sheet, property valuation has a significant impact on financial markets in general. The measurement of property is a fundamental basis for valuation, occupation or building use, investment and financial reporting. It serves as a tool for comparison and underpins decision-making as well as public confidence.
Unfortunately, while real estate transactions have transcended international boundaries, measurement standards remain local. There are a myriad of different standards for property space measurement worldwide. For example, floor area measurements in Spain often include swimming pools, while in India they can include off-site car parks as well as common areas. This means that two identical properties could have very different measurements in two different countries. Research suggests that the measured size of a given property could deviate by as much as 30%, making it hard to compare like-for-like. This lack of transparency of measurement standards prevents buyers from being sure of what they will get, complicates investment across borders and makes it very challenging to accurately assess international property portfolios.
An even more severe issue is the impact of inconsistent measurement practices on accurate financial reporting. More than 113 countries around the world adhere to the International Financial Reporting Standards (IFRS) – a standard approach to publishing a company’s financial data. Since the IFRS factors in the value of property assets under a company’s ownership, the IFRS is then inherently flawed on a global level. In some situations, this can lead to malpractice and there is plenty of anecdotal evidence to suggest that property measurements can be manipulated using different approaches to achieve a pre-determined figure.
Therefore, it is vital to have a globally consistent method for measuring property and infrastructural assets.
In May 2013, the International Property Measurement Standard Coalition (IPMSC) was formed, consisting of a group of professional organisations from around the world, to address the issue of inconsistent measurement standards. The International Property Measurement Standard (IPMS) was proposed as a shared, internationally adopted method that professional institutions would implement together for the benefit of property professionals and those affected by inconsistent practices.
The Standards Setting Committee (SSC), nominated by the IPMSC, worked together as an independent group to develop the principles, methodology and measurement practices for the IPMS based on a widespread consultation to understand the measurement conventions used in different international markets.
The first in a series of IPMS (for Office Buildings) was launched in November 2014, and is now available for download. The next IPMS for Residential Buildings is expected to be published in 2015 and standards for retail and industrial properties are to follow.