Property Investments

Investment Property is property (land or a building or both or a part) held by the owner or by a lessee under a finance lease to earn rental or capital appreciation or both, rather than for use in the production or supply of goods and services or for the administrative purposes or sale in the ordinary course of business. A property interest that is held by a lessee under an operating lease may also be classified and accounted for as Investment Property if the property meets the definition of investment property and the entity uses fair value model to account the investment property. An asset is recognized as an investment property as and when it is probable to receive future economic benefits, and cost can be reliably measured. An investment property is initially measured at cost. Cost comprises the purchase price and attributable direct costs for a purchased investment property while land and construction costs for constructed investment property. An entity does not consider the costs for the day-to-day servicing under the carrying amount of an investment property but such costs are charged to profit or loss. If the payments to investment properties are deferred then the cash price equivalent is taken as the cost. The initial cost of investment property held under lease shall be lower of the fair value of the property and the present value of the minimum lease payments. An equivalent amount shall be shown as a liability. Here the fair value of the property is the fair value of the interest held in the leased property and not the underlying property. If a property under operating lease is accounted as investment property, then it needs to opt fair value accounting and the cost option is not available. The investment properties under construction could also be measured at fair value if fair values could be determined which before was being accounted at cost until the completion of the construction. If an entity opts fair value or cost basis for its investment property it is required to apply the same basis for the similar properties. In a property trust, you buy ‘units’ in an investment operated by a professional investment manager. Other investors also buy units in the property trust. The property trust’s money is invested in the property market. Your money usually stays in the Property Trust until it ends, when the properties are sold and the net proceeds are distributed to investors. Some property trusts allow you to withdraw early. Because property trusts invest in property, their assets are less readily ‘saleable’ or ‘liquid’ than some other investments. This could limit when and how you can withdraw from the property trust. Many property trusts do not offer withdrawal rights at all. Some property trusts invest in property development, which means there are extra construction and development risks compared with investments in established buildings. A property trust will have other expenses as well as interest and should have a reasonable buffer between earnings and interest payments. Knowing what a property trust’s real property assets are worth can help you assess its financial position.