Investment property in Use

Investment property is carried at fair value and is assessed on a semi-annual basis.

The fair value of completed investment property is determined using the discounted cash flow method (DCF), with explicit assumptions regarding the benefits and liabilities of ownership over the asset’s life, including an exit, or terminal, value. As an accepted method within the income approach to valuation, the DCF method involves the projection of a series of cash flows onto a real property interest. To these projected cash flow series, an appropriate, market-derived discount rate is applied to establish the present value of cash inflows associated with the real property.

The duration of cash flow, and the specific timing of inflows and outflows, are determined by events such as rent reviews, lease renewal and related lease-up periods, re-letting, redevelopment or refurbishment. The appropriate duration is typically driven by market behaviour. In the case of investment properties, periodic cash flow is typically estimated as gross income less vacancy, non-recoverable expenses, collection losses, lease incentives, maintenance costs, agent and commission fees, and other operating and management expenses. The series of periodic net cash inflows, combined with the estimated terminal value anticipated at the end of the projection period, is then discounted.

For the year ended 31 December 2017 the Group commissioned independent year-end appraisal reports on its investment property from Cushman&Wakefield, Cushman&Wakefield Affiliate Partners and Colliers International, and for the year ended 31 December 2016, the Group commissioned independent year-end appraisal reports on its investment property from Cushman&Wakefield, all members of the Royal Institution of Chartered Surveyors (RICS). The fair value of investment property is based on these. The Group’s investment property is classified Level Three on the fair value hierarchy as defined in IFRS 13.

For all investment properties, their current use equates to the highest and best use. The Group’s Finance department includes a team that reviews the valuations performed by the independent valuers for financial reporting purposes. This team reports directly to the Chief Financial Officer (CFO) and the Audit Committee (AC). Discussions of valuation processes and results are held between the CFO, AC, the valuation team and the independent valuers at least twice a year.

At each financial year end the finance department:

  • verifies all major inputs to the independent valuation report;
  • assesses property valuation movements when compared to the prior year valuation report; and
  • holds discussions with the independent valuer.

At the end of the reporting period, the Group’s portfolio included retail, office and industrial properties.