This study examines the fair value (FV) changes of investment properties of European real estate firms in the COVID-19 pandemic year. More precisely, we compare the FV changes in the pandemic year to the previous three years and analyze whether the observed change in the valuation is associated with appraiser and property portfolio types, as well as industry classification and country affiliations. Finally, we assess whether the relative FV adjustments and appraiser type are associated with the market value of equity.
We calculate the detrended change in FV by subtracting the average of the prior three years' FV ratio from the pandemic year's FV. We perform regression analysis to examine whether the detrended change in FV is associated with variables of interest, i.e. the appraiser and property portfolio types and industry classification and country affiliations. We also perform regression analysis to examine whether the FV adjustments or appraiser type are associated with the share price.
We find that firms employing external appraisers make relatively more downward FV adjustments, and firms relying on internal appraisers make relatively more upward adjustments in the pandemic. The results also show that in the pandemic year, firms primarily holding retail properties and hotels made more conservative adjustments, whereas firms owning industrial properties made less conservative adjustments. Furthermore, our results show that firms from the Nordic as well as the hardest-hit countries were more often less conservative in their valuations than firms from other countries. Finally, when we assess the value relevance of the FV adjustments and appraiser type, we find that only the relative change in FV contains information that could be relevant to firm value.
The study contributes to pandemic research by examining how real estate firms reacted to the pandemic in the accounting context and on the link between appraisers of investment properties and valuation.
