Beyond financial modeling: Why real estate firms need to invest in technology

Posted on by Emily Wells

real-estate-financial-modelingAs the real estate investment industry evolves, financial modeling will remain a key factor in allowing real estate investment
trusts (REITs) and other organizations that invest in real estate to make informed decisions and gain competitive advantage. The ability to evaluate the impact of multiple factors on your portfolio improves performance and maximizes returns for stakeholders. But if financial modeling is already an integral part of the planning, analysis and forecasting process, why do many real estate firms fail to capitalize on worthwhile opportunities?

According to a report commissioned by CIMA and the AICPA, 80% of C-level executives have made strategic decisions based on flawed data. In addition, 42% of survey respondents claim to have “lost competitive advantage to more agile competitors” because of slow decision making. While many industries are addressing these problems by adopting new technology, the real estate industry lags behind.

Real estate financial modeling technology

The slow adoption of industry-specific software and tools is one of the main reasons real estate firms struggle to take full advantage of opportunities. Investment modeling software designed for the unique needs of the real estate industry plays a critical role in supporting a competitive strategy, and firms that choose not to embrace it run the risk of losing market share in the future.

Three roadblocks to success for real estate organizations:

  1. Slow decision making – Based on the report mentioned above, 72% of companies surveyed blame slow decision making for the failure of at least one strategic initiative. With the right tools in place, real estate firms can reduce inefficiencies within the organization, streamline processes, and break down organizational silos to make way for faster, more accurate decisions that maximize returns and minimize risks.
  2. Inefficient data management – Poor data quality, inadequate tools for extracting, analyzing and transforming data into meaningful insights, and poor systems integration prevent organizations from using data to their advantage. Many firms are using nothing more than spreadsheets to manage billion-dollar investment portfolios, which only encourages operational inefficiencies and increases the risk of incorrect reporting and flawed decision making. Firms that leverage business intelligence and analytics tools can spend less time chasing data and more time on business-critical initiatives.
  3. Lack of agility – Shifting market conditions as well as economic uncertainty can have an immediate impact on the value of real estate investment portfolios. To stay competitive, real estate executives must embrace agile strategic planning to speed up the decision-making process, minimize risk, and generate optimal returns. The ability to remodel scenarios quickly will help firms assess the best course of action for the organization and its investment portfolio in the short and long term.

With uncertainty becoming the new normal, real estate investment leaders need to leverage technology to make informed decisions, aggregate large volumes of data from multiple sources, and increase agility to stay in control of business strategy and performance management.

Is your firm ready to take financial modeling to the next level? Download the Investment Modeling Buyer’s Guide to find out how to choose the right software for your real estate firm.

 

Decision time for real estate professionals: how will you implement new lease accounting standards?

Posted on by MRI

With new lease accounting standards coming into effect, businesses must decide how to manage the transition and ensure their property management technology is up to the job

The impact of the IFRS 16 accounting standard will be huge for many publicly-listed companies. For the first time, almost all lease obligations will have to be accounted for on the balance sheet – that will see the average company’s debt increase by 22% according to analysis by PwC, and by significantly more in sectors where businesses have big portfolios of property leases, such as retail and leisure.

The new rules are likely to have profound effects on how businesses think about leases for many years to come, but the first challenge is to manage the transition to IFRS 16; that will require companies to look at the capabilities of their current property management technology and to consider the pros and cons of different adoption methods.

In drafting IFRS 16, the International Accounting Standards Board (slightly different rules apply in the US under the Financial Accounting Standards Board’s Topic 842 equivalent standard) has given companies two options for making the transition:

  • Fully retrospective accounting – under this option, for reporting periods that end after the effective date of the new standard, companies report on all their leases on an IFRS 16 basis as if the standard had always been in place; they must also provide a comparison of how their reporting would have looked under the previous rules, so that the effect of the new standard is transparent and visible
  • Modified retrospective accounting – this is a more straightforward approach that requires companies simply to apply IFRS 16 on their leases from the effective date onwards, with an adjustment of retained earnings made on the balance sheets, but no comparison with the old method

Both approaches have advantages and disadvantages. The fully retrospective method provides a much more detailed overview of the figures and how they’ve changed under IFRS 16, and is likely to be more accurate; but it requires businesses to produce two reports simultaneously, will almost certainly be more expensive and time-consuming to deliver, and will need a large amount of historic lease data.

By contrast, the modified retrospective option will not depend on so much data and is likely to be considerably less burdensome; but it will depend on estimates rather than definitive information and could be less accurate, which may have knock-on effects on other key financial metrics.

The basic capability of the company’s property management technology is going to be one consideration in this choice. For example, is your system capable of generating the data required for the fully retrospective accounting? Can it even cope with the data requirements under the modified approach, which will still be demanding? Are you thinking about investing in new technology as part of the shift to IFRS 16 and should this capability be part of that decision-making process?

It will also be valuable to model the effects on the balance sheet and broader company finances of the two different options before you make a definitive decision. This will require collaboration with the finance function – and property management technology that is capable of producing the outputs finance will require to carry out this work.

Making the effort now, ahead of time, will pay dividends, particularly for businesses with large lease exposures. The selected transition approach will potentially have an impact on company profitability for years after transition – until the final lease in place at the moment of transition expires – so it’s crucial to get it right.

Takeaways:

  • New accounting standards that come into force in 2019 will require companies to record the value of real estate leases on their balance sheets
  • The new standards give two interim options for compliance: full retrospection and partial or modified retrospections
  • Both approaches have pros and cons, so real estate will need to consider the business’s individual circumstances to choose the right way forward
  • The transition approach you choose could have an impact on your company’s profitability
  • Plan ahead now to identify the best way to proceed before the new standards become operative

For more information on our lease accounting solution, please visit the IFRS 16 page.

Double Trouble for Real Estate: Coping with Two New Lease Accounting Standards

Posted on by MRI

New accounting standards requiring businesses to bring leasing obligations onto their balance sheets will require many companies to get to grips with two different sets of rules – will your property management technology cope?

It has been billed as the biggest shake-up in accounting standards for 30 years, but many businesses are not yet ready for the introduction of new rules on leases. While the rules are due to come into effect in 2019 throughout the world, their property management processes and technology may not be fit for purpose.

The rules will for the first time require businesses to include on their balance sheets the value of all their obligations on leases that are longer than 12 months. But while they are expected to hit one in two publicly-listed companies and add $2.8 trillion to company balance sheets, many firms are not prepared. In one survey published last year 43% of respondents said they were not very well informed about the changes or that it was too early to tell what the impacts would be.

That’s worrying given that many businesses are actually facing two sets of changes they will need to prepare for. Not only does the International Accounting Standards Board’s IFRS 16 set out the process for bringing leases on to the balance sheet, but the Financial Accounting Standards Board’s Topic 842 in the US does the same thing. Many businesses with international operations are therefore going to have to cope with both.

The good news is that the IASB and the FASB worked together in drafting their standards with the aim of delivering a converged standard that would be consistent globally. Nevertheless, while the two organisations were united by a common purpose – to tackle the fact that 85% of lease agreements and commitments do not appear on the balance sheet – there are some clear differences between the processes they have put in place.

These differences begin with the effective dates of the two standards. While IFRS 16 isn’t due to take effect until 1 January 2019, Topic 842’s effective date is 18 December 2018, a couple of weeks earlier. More significantly, however, the IASB takes the single model approach while the FASB has opted for a dual model:

  • The single model requires companies to account for all leases as “Type A” financing leases. The balance sheet therefore shows the acquisition of a right-of-use asset and a corresponding liability, with interest and amortisation expense recognised separately in the income statement.
  • The dual model classifies leases as either “Type A” or “Type B” (operating leases with a generally straight-line lease expense pattern); both must be on the balance sheet, but the expense recognition and presentation are different.

Several other technical variations flow from this distinction. In the US in particular, the distinction between financing and operating leases will require additional work when compiling balance sheets and income statements.

Another issue, meanwhile, is adoption. Under IFRS 16, businesses are able to choose between fully retrospective reporting when accounting for existing leases, or a modified version; Topic 842 offers only the latter.

The question now for many real estate professionals – for property leases are likely to form the burden of most companies’ compliance work – is whether their property management technology is capable of coping with both sets of rules. Does it offer the functionality to identify and extract the key data under both IFRS 16 and Topic 842, and to feed that information into the finance department’s IT systems?

If not, the transition to the new standards is likely to be a painful one, requiring doubling up of effort and manual interventions to ensure compliance with both regimes, both at the transition stage and on an ongoing basis thereafter.

That will suck in resources that could be put to far better use elsewhere – and risk pitching the real estate function against finance as both grow increasingly frustrated about the unnecessary workload.

Takeaways:

  • New accounting standards that come into force in 2019 will require companies to record the value of real estate leases on their balance sheets
  • The new standards are being introduced by both the IASB and the FASB, with subtle differences between the two authorities’ approach
  • Companies covered by both sets of standards must get to grips with the requirements of each one
  • The IASB takes the single model approach while the FASB has opted for a dual model

For more information on our lease accounting solution, please visit the IFRS 16 page.

Global Real Estate Valuation Software for UK

Posted on by MRI

Global Real Estate Valuation Software for UK

MRI Software’s Global Valuations for real estate continues to gain momentum with firms in the United Kingdom. The software is designed to do much more than value acquisitions, forecast cash flow, and accurately value complex commercial real estate assets. The revolutionary Valuations solution is engineered to simplify business processes, track valuation progress, and facilitate intercompany collaboration through MRI’s secure, web-enabled file sharing technology, MRI ShaRE.

At MRI, we’ve always been committed to providing flexibility and choice, even for commercial real estate valuations. That’s why our Global Valuations software is available in two deployment models depending on what works best for your business.

Desktop

This flexible solution is driven by a superior calculation engine capable of valuing the most simple to the most complex commercial assets over an unlimited time horizon. MRI Global Valuations supports all major geographical valuation standards, including term and reversion, hardcore, discounted cash flow (DCF), capitalization, and equivalent methods. The solution allows for multiple versions per asset, thereby supporting comprehensive side-by-side analysis at a lease, unit, and even account level.

SaaS

Did you know that MRI also provides a SaaS offering of our Global Valuations solution? The SaaS offering features all the same functionality of our desktop solution, plus additional features:

  • Central repository for asset and debt modelling functionality
  • Portfolio reporting and scenario modelling
  • Portfolio attribution analysis
  • Performance reporting (returns, IRR, XIRR, and more)

 

Valuation Advisory Board and UK Readiness

Over the last 18 months, MRI Software have been working with some of the leading UK investment institutions and service providers as part of a Valuations Advisory Board. The feedback from this group has been instrumental in ensuring our Valuations solution fulfills the requirements of the UK market. Collaboration between MRI and members of the Advisory Board has resulted in several key enhancements that are now available in the product today.

Additionally, MRI have been conducting invaluable Valuation Trials with institutions and service providers. The trials have proven the following with regards to MRI’s Global Valuations solution:

  • UK market-ready solution with a robust calculation engine for valuation service providers
  • Comprehensive suite of asset and fund modelling capabilities
  • Seamless integration via MRI ShaRE for browser-based collaboration

What’s in MRI’s latest real estate valuation software release?

We’re pleased to say that MRI’s latest release includes the following functionality:

UK Valuation Cost Schedule

A new Valuations Cost Schedule is available that reflects the costs considered in valuations and ignores costs that are forecasted after the reversion date. It allows users to review the capital costs contributing to valuation results in great detail.

Valuation Pages Redesign

In addition to functional changes, many UI enhancements have been made to improve the ease of producing the valuation. Based on industry best practices and driven by feedback from the UK Advisory Board, these changes allow UK valuers to see and modify all key data points on one page.

Lease Revenue Costs based on % of ERV or % of Passing Rent

Lease Revenue Costs can now be calculated in the Derived Charges section of a Lease Contract. Start Date and End Date fields have been added for use whenever the calculation mechanism is % of Market or % of Passing, and a Once Only option is also available when no recurrence is required.

Fixed and Rate PSF Market Lease Revenue Costs

Stated Charges in a Market Lease can now be calculated as a Fixed amount (as opposed to a continuing or market rate), and this can be defined as either a per annum or per square foot amount.

Capital Costs Spread Across Void Periods

A new Spread (Void) calculation type has been added to the Property and Unit Capital Costs page. When a per annum or per square foot amount is entered for the cost, it will be spread evenly across each void period based on the vacant space.

WALE Report Includes Executed Renewals and Monthly Leases

The Weighted Average Lease Expiry (WALE) report now always considers the latest lease with a Lease Status of Executed. A new Include Non-Executed Leases setting will allow it to consider non-executed leases.

Holdover Leases Treated as Known at the Current Date

A new Treat Holdover as Known setting is available on the Weighted Average Lease Expiry (WALE) report and Lease Expiry reports. The setting allows holdover leases to be considered as a “known” leases up to the end of the model’s current date.

Valuation Reports Enhancements

Various changes have been made to improve both the Detailed Valuations and Valuation Summary reports. This includes:

  • New runtime settings to control the Report Date, Model, and Show sections
  • Rows and columns are automatically frozen when only one section is displayed to ensure key cells are always visible when scrolling
  • A new column in the Running Yields section to display Quarterly in Advance yields
  • Links in the Unit Valuations section to open the specific Unit Details page
  • An Event Type column in the Unit Valuations section that displays the primary event that causes the valuation event

Costs Calculated Off Net Say Value

A new option is available to allow Investment Costs to be calculated off the Net Say Value (rounded) instead of the Net Value (unrounded). 

Fixed Fee on Purchaser’s Costs

Purchaser’s costs can now include a Fixed Fee amount in addition to existing fees. The other Purchaser’s Costs are calculated after the Fixed Fee has been applied, and VAT % will be applied to the Fixed Fee, if provided.

Different Fees for Entry and Exit Valuations

A new set of fees is available to provide different costs for entry (current) valuations and exit (future) valuations. These include Agent, Legal, Fixed, and Other fees.

Initial Yield Method

A new Use Initial Yield for Exit Valuations option is available in Capitalisation Groups to switch to the Initial Yield method when calculating future valuations.

If you would like to find out more about any of the above, please contact us.

Workflow Automation for Commercial Real Estate

Posted on by MRI

Commercial real estate (CRE) firms tend to rely heavily on spreadsheet tools such as Excel to perform complex analysis and financial modeling tasks. The time-consuming process of integrating data from disparate sources, such as an accounting system, legacy systems, and even other spreadsheets, often involves inefficient workflow management. Many CRE firms are seeing significant value from using real estate financial modeling software to improve workflow automation and eliminate manual processes.

Commercial Real Estate Software versus Excel spreadsheets

Overreliance on spreadsheets to manage data aggregation, modeling, and analysis creates risks for the business on multiple levels. Excel perpetuates a siloed, error-prone, highly manual processing environment, and it is not easy to collaborate or perform complex calculations.

Knowledge Sharing – Organizationally, firms that use spreadsheets as a core part of their processes have great difficulty sharing knowledge with others in the company, and there is little opportunity for process improvement. Any insight that the business user gains while analyzing Excel spreadsheets stays with the user, whereas CRE software offers an automated workflow that allows others to access and share insights that have been derived from analysis, without compromising the security of the data.

Version Control – When spreadsheets housed on local workstations are sent to other users, it’s very difficult to maintain version control, and this can greatly increase the risk of mistakes. A real estate modeling solution can serve as a system of record that ensures all users are looking at the most recent information and that the data has been normalized to avoid discrepancies.

Efficiency and Agility – The typical model running in Excel requires so much data wrangling, cleansing, and manipulation that precious little time remains to perform the actual analysis on the data. When the preparation work takes up to 85% of the total time and effort required, the value of the resulting analysis is greatly reduced, and the outcome may no longer be relevant or timely. A CRE solution allows staff to create financial models significantly faster, which provides more accurate information that real estate executives can then use to make decisions.

Automate Commercial Real Estate Workflow

To drive the most value, a software solution designed specifically for the industry is the only way to make the transition from thousands of spreadsheets and reduce the mammoth manual effort currently in use at many CRE companies.

Dedicated software for financial modeling and portfolio management pays for itself within months by:

  • Reducing the non-value hours of staff
  • Improving the value of solid decision support
  • Delivering real profit-enhancing value

A flexible CRE financial modeling software can easily integrate with other systems, such as external accounting or property management systems. The ability to leverage multiple systems gives CRE firms expanded functionality to achieve business goals, while presenting a seamless experience for system users.

Increase Value and Productivity

Implementing a CRE solution often results in a paradigm shift for the organization. Employees that previously spent too much time on manual processes now feel that their efforts add more value to the business. This results in increased productivity and improved employee morale, almost without exception. Personnel can focus their attention on value-add opportunities for the business, such as:

  • Maximizing capital utilization
  • Minimizing tax burdens
  • Anticipating events such as interest rate increases
  • Identifying new business opportunities

Becoming more analysis-driven is transformative for CRE firms. As more people devote time and effort to analysis work, more innovation and new ideas are generated. Data sharing across departments fosters the development of new ideas, and opportunities, threats, and general trends are identified sooner with better tools and refined processes.

Learn how your firm can automate workflow and eliminate manual processes with commercial real estate modeling solutions.

Partners in property: Why new lease accounting rules will force real estate and finance to work together

Posted on by MRI

To comply with new lease accounting standards governing leases, businesses’ real estate and finance functions will need to collaborate via property management technology.

One former chairman of the International Accounting Standards board used to joke that his ambition was to one day fly in a plane that actually existed on the airline’s balance sheet. The point being that assets leased rather than owned by a business have never had to be included in such accounting, even though they may constitute substantial liabilities.

Until now that is. New regulation due to come into force in January 2019 will require all publicly-listed companies to include the value of their leasing obligations in their annual statements of assets and liabilities – and for most companies the biggest impact is going to come from their portfolios of real estate.

The rules, contained in the IASB’s IFRS 16 standard (and the Topic 842 regulation from the Financial Accounting Standards Board in the US), are set to have a huge effect on the publicly-declared state of the finances at many companies – particularly larger retailers and hoteliers that may have huge estates of leased properties.

Given the significance of the changes to come – the new lease accounting standard, by some estimates, will bring $2.8trn worth of assets on to company balance sheets globally – it’s not surprising that finance departments are beginning to get nervous. But when it comes to the business’s property leases, do they have a handle on their exposures?

The short answer at many companies is likely to be no. Property leases, understandably, have until now been almost entirely the domain of the real estate function, with finance paying relatively little attention.

So can the task of preparing for IFRS 16 be left to the business’s real estate professionals? Again, the answer is pretty obvious; even the most experienced property teams are unlikely to have the accounting expertise necessary to manage compliance in the right way by themselves. And even if they do, finance will need to consider the effects of lease accounting in the context of the business’ balance sheet.

Instead, a joint approach is now required. That will require businesses’ real estate and finance functions to work together more closely than ever before; there will also be a crucial role for better property management technology.

Essentially, complying with IFRS 16 is going to be a three-stage process. Businesses will need first to identify and consolidate all their relevant lease files; then they’ll need to work out which of the leases are caught by the new standards (some short-term leases won’t be); finally, they’ll need to bring all economically relevant data points onto the balance sheet.

It’s likely that the real estate function will do the lion’s share of the work involved with the first of those tasks, while the second job looks more like a joint effort and the final stage is going to see finance take the lead. But neither side is going to be able to do any of this work effectively without collaborating with the other.

The ideal scenario is that the business’s real estate team talks to finance right now about the data that’s going to be required. It can then consider whether its current property management technology is up to the job of generating all of the data required – and, if not, what the alternatives might be.

With the right technology in place, the process can be very smooth. Real estate will ensure its systems are capable of delivering all the information that finance requires to meet its accounting obligations from January 2019 onwards; and when the standard kicks in, all relevant information will already be flowing between the two functions.

Without a closer working relationship, however, the scope for confusion and, potentially, non-compliance is frightening.

Takeaways:

  • New lease accounting standards that come into force in 2019 will require companies to record the value of real estate leases on their balance sheets
  • Both real estate and finance will need to work together to deliver compliance under the new standards
  • Property management technology can help real estate provide finance with the key data and information required
  • By working more closely together, real estate and finance can take a strategic approach to future lease design

For more information on our lease accounting solution, please visit the IFRS 16 page.

Why New Accounting Standards Will Raise Real Estate’s Corporate Profile

Posted on by MRI

New accounting standards on leases represent a burden for real estate, but functions that leverage their property management technology effectively have an opportunity to become trusted strategic advisers to the business

Property will account for a sizeable chunk of the $2.8trn worth of assets that will move on to the balance sheets of publicly-listed companies once new rules on accounting for lease obligations come into force from 2019. So while some real estate professionals may be cursing the International Accounting Standards Board and the Financial Accounting Standards Board, whose IFRS 16 and Topic 842 standards will add to their workloads, the reforms should also be seen as a real opportunity for the property function.

Given the sums at stake – and the way in which IFRS 16 and Topic 842 have the potential to alter the perceptions of stakeholders such as investors about businesses with large numbers of leases – the implementation and ongoing management of the standards is going to be a high-profile activity for many companies. Real estate professionals therefore have a choice: they can seize the initiative and raise their profile as strategic partners to the C-suite, or they can leave finance to take the lead.

From the perspective of both real estate itself and the business, the former option represents the preferable option. While finance will clearly have a very significant role to play in managing the impact of these reforms, real estate has the technical knowledge and experience of the business’s existing property leases, and its approach to new leases, to make a very valuable contribution.

Business leaders recognise this. Research published recently by PwC reports: “Active management of real estate assets is becoming a strategic imperative for users and the newly established lease accounting standard is an incentive to reconsider real estate strategy.”

However, if real estate is to play an active role in recasting its strategic role, it cannot be a passive participant in the process of adjusting to IFRS 16 and Topic 842. And that may require a change of mindset – in some cases, real estate already appears to have accepted a secondary position in this shift, simply responding to the requests coming from finance, rather than helping to lead the response.

That’s unfortunate, for the property management technology tools employed by many businesses can provide real estate with the data required to inform both the best way to account for existing leases under the new standards and the right leasing strategy for the business in the future. And where your property management technology does not currently offer this level of functionality, investment will be required in order to support compliance in future.

Armed with this data – and its technical understanding of the nuances of leasing – the real estate function is ideally placed to add significant strategic value when working alongside finance to manage the new standards. That’s in the interests of the wider company, of course, but will also see real estate move front and central amongst those functions consider business critical by senior management.

Real estate functions that don’t make this leap, meanwhile, will still have a role to play, but as a support service rather than a strategic partner. That would be a missed opportunity – while businesses will continue to demand technical expertise from real estate, they will also be increasingly open to the function playing this much more strategic role.

Takeaways:

  • New accounting standards that come into force in 2019 will require companies to record the value of real estate leases on their balance sheets
  • The scale of the potential impact of leases on the balance sheet will focus attention on the real estate function
  • The standards therefore represent an opportunity for real estate to prove its value as a strategic business partner

For more information on our lease accounting solution, please visit the IFRS 16 page.