What does "IFRS 16" mean in real estate?

IFRS 16 is the international lease accounting standard that changed how companies report real estate leases. In plain terms: it requires lessees to put almost all property leases onto the balance sheet as a right-of-use asset and a matching lease liability, unless the lease is short-term (12 months or less) or the asset is of low value. For real estate—offices, retail stores, warehouses—this means many previously off‑balance-sheet operating leases are now capitalized, changing reported assets, liabilities and key financial ratios.

Key concepts for real estate

Right-of-Use Asset — the lessee’s recognized right to use the leased property for the lease term (see right-of-use asset).
Lease Liability — the present value of future lease payments the lessee is obligated to make (see lease liability).
Lease Term — includes the non‑cancellable period plus extension/termination options when it is reasonably certain they will be exercised (see lease-term).
Income statement effect — lease payments are replaced by depreciation of the right-of-use asset and interest on the lease liability; rent expense largely disappears from operating costs.
Exemptions — short‑term leases (≤12 months) and low‑value assets can remain off the balance sheet.

How IFRS 16 changes real estate reporting

Before IFRS 16, many real estate leases were treated as operating leases and shown only as rental expense in the income statement. Under IFRS 16 the same leases are capitalized: the balance sheet reports a right-of-use asset and a corresponding lease liability. That increases reported assets and liabilities, can raise reported leverage (debt-to-equity), and often improves reported EBITDA because rent expense is removed from operating expenses while depreciation and interest are shown below EBITDA.

Practical examples

Scenario	Impact under IFRS 16
10-year office lease with annual payments	Lessee records a right-of-use asset and lease liability equal to the present value of 10 years of payments; recognizes depreciation over the lease term and interest on the liability each period; balance sheet and leverage increase.
Retail chain leasing many stores	All store leases over 12 months are capitalized. EBITDA typically rises (rent removed from operating costs); covenant compliance and borrowing capacity may be affected because liabilities increase.
Long-term lease of a specialized asset (e.g., solar farm)	Even specialized property can qualify as a lease if the lessee controls use of the identified asset — so the right-of-use asset and lease liability are recognized.

Illustrative numerical example

Company leases an office for 10 years, pays $100,000 annually, discount rate 5%.

Present value of payments = $100,000 × (1−1.05⁻¹⁰)/0.05 ≈ $772,174. At lease commencement:

Recognize right-of-use asset = $772,174
Recognize lease liability = $772,174

Each year (straight-line depreciation): depreciation = $772,174 / 10 = $77,217. First‑year interest = $772,174 × 5% = $38,609. When the $100,000 payment is made, interest (38,609) is recognized and the remaining $61,391 reduces the liability.

Income statement effect in year 1: depreciation $77,217 + interest $38,609 replace the prior rent expense of $100,000. EBITDA usually increases because depreciation and interest are excluded from EBITDA while rent was included.

Benefits and challenges for real estate teams

Benefits: Greater transparency of lease obligations for investors and lenders; consistent comparison across companies; clearer view of long‑term real estate commitments.
Challenges: Increased reported liabilities may affect debt covenants and credit ratings; operational burden to review and reassess lease terms, estimate extension/termination options and maintain lease accounting data.

What real estate professionals should do

Inventory all property leases and identify which qualify under IFRS 16 (exclude short‑term and low‑value items).
Determine lease terms and make reasonable‑certainty assessments for options to extend or terminate.
Calculate present value of future lease payments using an appropriate discount rate and recognize right-of-use assets and lease liabilities.
Update budgeting, covenant forecasting and KPI reporting to reflect higher assets and liabilities and the new split of expense into depreciation and interest.
Coordinate with auditors, lenders and investors to explain the accounting change and its practical impact on financial ratios and covenants.

Bottom line

For real estate, IFRS 16 means leases are visible on the balance sheet. Lessees recognize a right-of-use asset and a lease liability for most property leases, which changes reported leverage, shifts expense recognition from rent to depreciation and interest, and requires more detailed lease management. The standard took effect on January 1, 2019, and applies globally under IFRS—making lease commitments clearer but increasing the administrative and financial-reporting work for property teams.