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International Property
Measurement Standards
What do Commercial Real Estate Pros
need to know?
by Neil Shah
www.ccim.com/cire-magazine/issues/mayjun15
Suppose
you’re considering a purchase, such as a tablet, and decide to
comparison-shop among several different manufacturers. However, when you do a
little research, you find the specs for an item, such as storage capacity,
are measured differently from one manufacturer to another. As a result,
you’re comparing apples to oranges instead of apples to apples. You really
don’t know how one tablet stacks up against another, even though they’re all
the same type of device.
That’s
the situation commercial real estate investors, brokers, leasing agents —
and, in fact, anyone dealing with property — currently face and have faced
throughout history. The way property assets, such as homes, offices, and
shopping centers, are measured varies dramatically. For example, in some
parts of the world, it is an established practice to include common space,
such as elevator shafts and communal hallways, in floor area measurements; in
other markets, off-site parking or even swimming pools might be included.
So
many different methods of measurement in use makes it difficult for tenants,
landlords, investors, and developers to accurately compare space. Research
shows that a property’s floor area can deviate by as much as 24 percent
depending on the method used, according to global property firm JLL.
Aside
from the obvious confusion this can bring for tenants and buyers, there are
some very significant and damaging implications for business and for wider
economies that rely on consistent property data for financial reporting
purposes. For example, the lack of consistency in property measurement data
helps undermine achieving greater transparency through existing international
standards such as International Valuation Standards and International
Financial Reporting Standards. And for businesses and financial markets, the
existing inconsistencies negatively affect financial reporting, which
requires businesses to document their total assets, including property.
Implementing
Change
The
International Property Measurement Standards Coalition is an international
group of more than 60 professional and not-for-profit organizations, including
the Building Owners and Managers Association International, CoreNet Global,
the Real Property Association of Canada, and the Institute of Real Estate
Management, working together to develop and embed a single property
measurement standard in the industry. The Royal Institution of Chartered
Surveyors — an international organization that promotes and enforces the
highest professional qualifications and standards in the development and
management of land, real estate, property, and construction — was among the
founding members of this coalition.
The
International Property Measurement Standard will ensure that property assets
are measured in a consistent way, creating a more transparent marketplace,
greater public trust, stronger investor confidence, and increased market
stability.
IPMS
is a new, principles-based, international standard that sets out how to
measure property assets. It means that for the first time, property will be
measured in a consistent way around the world. IPMS does not define the units
of measurement such as feet and meters, but instead it defines what is
included in the measurement of property floor space. The first phase of IPMS,
announced last November, applies only to office space. Future standards on
measurement of other asset types are planned over the next few years.
IPMS
in Action
IPMS
will become established over time throughout the global marketplace as
property users come to understand the benefits of using a common method for
measuring property assets. In some markets, it is probable that existing
standards will remain in place and may at first be complemented by IPMS;
however, IPMS will always be secondary to any legally mandated requirements.
Where possible, the coalition will undertake to work with governments to review
and update laws to reflect IPMS. In addition, the new standard will operate
alongside and enhance existing international standards such as IVS and IFRS.
An international standard for measuring property was virtually inevitable in
an increasingly global real estate sector.
IPMS
will not directly affect transactions in the United States or elsewhere,
because the sale or transacted price is not determined by measurement but
rather by market forces such as demand and scarcity. The fact that a
measurement of an office building may change when measured in accordance with
IPMS does not change the price that an asset or liability should exchange on
the valuation date between a willing buyer and a willing seller.
However,
the new standard could indirectly affect transactions. For example, if IPMS
doubles the quoted size of a property then the price per square foot would be
cut in half as a result. And if IPMS halved the size of a property, then the
price psf would double to reflect this change.
The
industry largely understands the case for an international standard and is
prepared to be involved in this process. Most measurements have already been
taken, and a free web conversion tool will be provided later this year to
convert IPMS into other major standards, to allow for dual reporting in the
near term. The market sees the potential in IPMS, and participants will be
asking their clients to adopt it. RICS and other members of the IPMSC are
helping the real estate industry get ready to deliver IPMS as the market demands
it.
Helping
International Investors
IPMS
will benefit international real estate investors in a number of ways,
including:
- providing a mechanism for
benchmarking property measurement information across international
markets;
- offering a common and transportable
method for property practitioners to use;
- enabling international tenants,
investors, and owners to benchmark their property assets without needing
to spend significant sums of money and resources calibrating space
measurements;
- providing greater transparency and
consistency to all property users, wherever they are located; and
- offering consistency in the data that
accompanies valuations and financial reporting, thereby assisting
property and facilities managers in comparing and utilizing space.
In
summary, IPMS will provide greater confidence and consistency in property
measurement for investors.
Investor
communities will play an enormous role in the success of IPMS, as will other
stakeholders such as banks, property advisers, and other external
stakeholders. More than 120 organizations so far have registered to support
the IPMS initiative as partners, and have signed declarations to help the
implementation of IPMS in their businesses and markets. Specifically,
partners agree in principle to adopt IPMS measurements by either using them
or requesting them within their work. Among the early partners are major
corporate tenants such as Vodafone and the International Monetary Fund, as
well as leading property consultancies including JLL Middle East and CBRE
Middle East. The Dubai government has become
the first national government to formally endorse IPMS and Jamaica’s
National Land Agency recently also endorsed the initiative, with other
governments beginning to follow their lead.
As for
next steps, the IPMS Standards Setting Committee is now working on subsequent
international property measurement standards and is hoping to publish IPMS
for residential buildings later this year. In due course, the committee will
also publish IPMS for industrial, retail, and mixed use. This should bring
greater confidence and uniformity to property measurements in these markets
as well.
Neil Shah is managing
director of RICS Americas, covering the U.S.,
Canada, Latin America, and
the Caribbean. Contact him at nshah@rics.org.
Blogger Note:
Downloading The International Property Measurement Standards documents on different property types, please go to: http://ipmsc.org/standards/
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