Fears that lease rules will put off investors

Posted On Monday, 22 August 2005 02:00 Published by eProp Commercial Property News
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The outcry about new accounting requirements on operating leases gathered steam on Tuesday, with the CEO of property group Ambit, saying the requirements were "diabolical for the listed property sector".

Property-Housing-ResidentialNick Harris, speaking yesterday at the third annual valuation conference hosted by the Investment Property Databank SA, said his "biggest worry" was that the confusion the requirements would create could harm the sector as an investment medium.

"Now a lot of retired people who normally buy into the sector might not want to get into it because they don't understand what they?re buying into."

Harris said some property funds might even have to publish two separate sets of results, one that which would include the changes to satisfy accountants and another to explain the "true picture" to investors. Earlier this month, the South African Institute of Chartered Accountants said the adoption of international interpretations of operating leases might result in changes to reported results.

The institute said an accounting issue had arisen over the basis on which the cash flows relating to operating leases should be allocated to different periods during the lease period.

For example, the accounts of a property landlord, such as a listed property unit trust and property loan stock company that had entered into a 10-year lease agreement with a tenant with a 5% increase every year, in the year, would normally reflect varying amounts of income each financial year over the 10-year period.

Now landlords would be required to reflect the average income received over a 10-year period in each financial year.

This means listed property companies and funds will have to account for money they have not yet received each financial year. Listed property players have complained, saying this could result in grossly misstated and inflated accounting earnings for the year.

Harris said that in terms of how the interpretation of their trust deeds stand stood, listed property unit trusts, for instance, might be forced to distribute income they had not yet received from tenants. In terms of property unit trusts' trust deeds, they have to distribute all their income to unitholders.


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