Investment Properties: Definition & Examples

Investment Properties are real estate assets (land or buildings) held by a company to earn rentals, for capital appreciation, or both, rather than for use in production, supply of goods/services, or administrative purposes. Under IFRS (IAS 40), these properties are accounted for separately from owner-occupied property (PP&E), with unique measurement and recognition options.

Definition and Scope

Investment Properties under IAS 40 include:

• Land held for long-term capital appreciation
• Land held for undetermined future use
• Buildings leased out under operating leases
• Buildings vacant but held for future leasing
• Properties under development for future investment use

Excluded: Owner-occupied (PP&E), property for sale in ordinary course (inventory), or under construction for third parties.

US GAAP has no equivalent category—all treated as PP&E under ASC 360.

“No asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough.”

— Howard Marks, Co-Chairman, Oaktree Capital Management Oaktree Memo: ‘The Most Important Thing’ (2003)

Accounting Models

IAS 40 offers two models (policy choice, applied consistently):

Fair Value Model (Preferred by many)

• Measured at fair value each period
• Gains/losses recognized in profit or loss
• No depreciation
• Fair value reflects market conditions and highest/best use

Cost Model

• Carried at cost less accumulated depreciation/impairment
• Same as PP&E
• Fair value disclosed in notes

Transfers between categories trigger remeasurement.

Balance Sheet Presentation

Under non-current assets as:

• ‘Investment Properties’
• ‘Investment Property’
• Fair value model: Single line at fair value
• Cost model: Gross cost less depreciation/impairment
• Separate from owner-occupied PP&E

Footnotes detail model used, valuation method, and rollforward.

Valuation and Changes

• Fair value typically by independent appraisers
• Based on market evidence, discounted cash flows, or capitalized income
• Changes in fair value directly impact profit or loss (fair value model)
• Rental income recognized separately in P&L

Common Industries

• Real estate investment companies (REITs)
• Property developers holding completed assets
• Retail/hospitality groups with leased properties
• Insurance and pension funds
• Companies with surplus real estate

Analytical Implications

Investment properties affect analysis by:

• Introducing earnings volatility (fair value changes)
• Reflecting real estate market exposure
• No depreciation charge (fair value model boosts reported profits)
• Higher asset values vs. cost model peers
• NAV (net asset value) relevance for property companies

Fair value gains can mask underlying operational performance.