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Performance Measurement
Performance Measurement Introduction
Consistent performance measurement – essential for global comparisons
The Performance Measurement module is the newest addition to the INREV Guidelines. At its heart is a standardised method for calculating performance returns.
This standardised approach to measuring performance will help strengthen risk management and encourage best practices in portfolio investment and operations. At the same time, harmonising key performance indicators among managers will make it easier to compare vehicles globally.
The metrics in the Performance Measurement module allow investors and managers to measure performance in a consistent way. They should also help optimize investment returns by allowing for more effective structuring and rebalancing within portfolios
Performance Measurement Committee
The committee aim is to define standards of performance measurement for non-listed real estate vehicles, and to create suitable indices to benchmark performance.
read moreMade to Measure
INREV’s new Performance Measurement Module is already helping create greater global alignment for fund managers.
read moreVideos
Benchmarking a non-listed RE portfolio
Katie Smith, CBRE, discusses the importance of benchmarking, challenges, and the use of consistent measures such as the INREV Index as a comparison for performance.
"The whole industry is about performance so we needed to give people a way to make sure they were comparing apples with apples."
Maurits Cammeraat, INREV Director of Professional Standards
Performance Measurement News
The INREV Index is a performance index for European non-listed real estate vehicles.
Useful information
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The INREV Index Analysis Tool allows you to compare the performance of vehicles listed in the INREV Index.
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If you have any questions, please contact professional.standards@inrev.org or phone +31 (0)20 235 8600
Introduction to Performance Measurement
PM-I01
The purpose of this Performance Measurement Module as part of the INREV Guidelines is to provide support to managers when computing and reporting historic performance measures of a vehicle. This module includes detailed computation formulae as well as examples to facilitate implementation. These guidelines have primarily been designed for direct property vehicles.
The guidelines aim to increase consistency in the reporting of performance to investors. The standardisation will also improve the relevance of indices, such as the INREV Index, which are potentially used as points of reference. Comparing the performance of a vehicle can add additional insight into a vehicle’s performance. The point of reference should contain vehicles with similar investment mandates, objectives or strategies.
The guidelines have been developed as a consequence of increased demand for standardised performance measures for non-listed real estate vehicles. Global Investment Performance Standards (“GIPS”) issued by the CFA Institute and the NCREIF PREA Reporting Standards have been considered when writing these recommendations. The level of effort for those managers that are in compliance with these standards should be limited to claim compliance with this module. Although the frameworks are different, the intention is to align the approaches and avoid conflicts in the methodologies. The Performance Measurement Module has also been developed in light of existing practice in the European non-listed real estate fund industry.
Performance measures and the level of disclosures may vary depending on the style of the vehicle (as determined in the INREV Fund Style Classification methodology). The level of discretion of a fund manager in determining the cash flows of a vehicle and investment restrictions vary significantly depending on the vehicle type. Some performance measures may not be appropriate for some vehicles. For instance, fund managers of closed ended vehicles have discretion over capital calls and distributions, while fund managers of open ended vehicles need to accommodate new issues and redemptions which may interfere with the portfolio strategy. In this context, money weighted returns are more relevant for closed ended vehicles whereas time weighted returns are more relevant for open ended vehicles.
Performance measurement guidelines include the minimum requirements to claim compliance with INREV guidelines. Managers are free to compute and disclose additional measures where they see fit.
Principles
PM-P01
Performance measures of a vehicle should represent fairly the performance of a vehicle. They should be reliable, consistently computed and presented to enable investors to understand and compare the performance of the vehicle.
PM-P02
Performance measurement should reflect the performance of the vehicle in the context of its style, type, structure and strategy.
Guidelines
PM01
Vehicle documentation should include the required performance measures disclosed by the manager and the frequency of disclosure to investors.
Managers should disclose the computed performance measures and methodology used. If the manager chooses to use a formula not in line with the proposed methodology set out in this module, this should be fully disclosed and explained.
Presentation of the vehicle level performance should be accompanied by adequate disclosures. The purposes of such disclosures are to provide present and potential investors with a precise and complete picture of the vehicle’s historic performance.
PM02
Performance measures should be calculated at the same frequency as the published NAV valuation of the vehicle, with annual being the minimum frequency.
It is expected that the investments owned by a vehicle are measured at fair value, whatever GAAP is used by the manager to determine the NAV of the vehicle.
Periods where a vehicle does not perform valuations can still be a data point as long as a NAV is determined. For instance a vehicle may provide quarterly NAVs, but only annual property valuations. In interim periods the NAV would reflect all changes of the balance sheet while holding the value of the property portfolio constant.
Some measures required in the guidelines may be less relevant during the investment/disinvestment period. However, managers are still required to provide the measures included in this module. Managers may provide comments alongside the measures to explain that the measures may be distorted due to the fact that the vehicle is its investment/disinvestment period.
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Open end vehicles |
Closed end vehicles |
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Performance measures described below are established at vehicle level. In addition, all performance measures are net of all costs borne by the vehicle. The Managers are free to disclose additional measures such as property level performance measures. |
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Time weighted returns are the preferred performance measure to use when a manager does not have control over the cash flows of the investment. This is typically seen in open ended vehicles and non-discretionary single client account portfolios. The Modified-Dietz Method is the used throughout the financial industry. |
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PM03
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A total return on a time weighted basis should be disclosed in the annual report. This measure should be provided on a one, three, five and ten year period (where the track record exists) and since inception on an annualised basis. A total return is computed as follows:
Annualisation is computed as follows: Where there is a return that is greater than 1 year, but not a full year period (e.g. one year and two months)
For full years the formula is as follows:
When a return greater than one year is annualised, it is also allowed to consider the exact number of days. |
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When component returns are presented for any period, the sum of the income return and capital return will generally equal the total return. When component returns are geometrically linked to create cumulative returns, the simple addition of the cumulative income return plus the cumulative capital return will not usually equal the cumulative total return. The difference is acceptable and no adjustment is required to any of the total return component.
PM04
| Open ended vehicles | Closed ended vehicles | |
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An income return should be disclosed. This measure should be provided on a one, three, five and ten year period (where a track record exists) and since inception on an annualised basis. An income return is computed as follows:
Net investment income = the net operational income of a vehicle, on an accruals basis, containing the income and cost described below. This excludes any capital transactions or movements in the reported period, including valuation gains or losses on assets and liabilities, transaction costs, sale proceeds and taxes on capital profits and losses. The components of net investment income are:
TwdC = Time weighted (daily) contributions for the measurement period |
✔ | ✔ |
PM05
| Open ended vehicles | Closed ended vehicles | |
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A capital return should be disclosed. This measure should be provided on a one, three, five and ten year period (where a track record exists) and since inception on an annualised basis. A capital return is computed as follows:
TwdC = Time weighted (daily) contributions for the measurement period |
✔ | ✔ |
PM06
| Open ended vehicles | Closed ended vehicles | |
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A distributed income return should be disclosed. Distributed income return is computed as follows:
TwdC = Time weighted (daily) contributions for the measurement period Distributions include dividends and interests paid during the period. Returns should be calculated on a money weighted basis where weight is put on the size and timing of the cash flows reflecting the manager’s control over in- and out-flows of the vehicles. |
✔ | ✔ |
PM07
| Open ended vehicles | Closed ended vehicles | |
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Since Inception Internal Rate of Return (“SI-IRR”) should be disclosed. SI-IRR is computed as follows:
This is otherwise known as a money-weighted return. |
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PM08
| Open ended vehicles | Closed ended vehicles | |
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A paid-in capital multiple or paid-in capital to committed capital multiple (PIC) should be disclosed. PIC is computed as follows: PIC PIC (Paid-in Capital) = Cumulative capital contributed to the vehicle CC (Committed Capital) = Cumulative capital plus undrawn capital. |
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PM09
| Open ended vehicles | Closed ended vehicles | |
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An Investment Multiple or Total Value to Paid-in Capital Multiple (“TVPI”) should be disclosed. TVPI is computed as follows: TV PIC (Paid in capital) = cumulative capital contributed to the vehicle |
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PM10
| Open ended vehicles | Closed ended vehicles | |
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Realisation Multiple or Cumulative Distributions to Paid-in Capital multiple (“DPI”) should be disclosed. DPI is computed as follows: D D = Distributions Distributions retained in the vehicle and not paid to the investors are considered as realised. |
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PM11
| Open ended vehicles | Closed ended vehicles | |
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An Unrealised Multiple or Residual Value to Paid-in Capital Multiple (“RVPI”) should be disclosed. RVPI is computed as follows: RV |
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PM12
| Open ended vehicles | Closed ended vehicles | |
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The following items should be disclosed alongside the performance measures:
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✔ | ✔ |
PM13
| Open ended vehicles | Closed ended vehicles | |
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Points of reference with the same vintage year or inception year should be disclosed if available and meaningful. Given the limited universe of vehicles in several markets, it may not be appropriate to use available main- or sub-real estate vehicle indices as points of reference. A manager should take reasonable care not to apply points of reference where the manager or vehicle in question accounts for a significant share of the underlying universe. When no appropriate point of reference exists, this must be disclosed. Where there is a difference between the performance objective and the point of reference, the objective may be used as a primary reference point as long as clearly disclosed. |
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PM14
| Open ended vehicles | Closed ended vehicles | |
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Where a composite and a point of reference are disclosed, they should be described. |
✔ | ✔ |
PM15
| Open ended vehicles | Closed ended vehicles | |
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Vehicles should disclose their vintage year. |
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PM16
| Open ended vehicles | Closed ended vehicles | |
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Where a composite is presented a composite description must be disclosed. |
✔ | ✔ |
PM17
| Open ended vehicles | Closed ended vehicles | |
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The time period and frequency of cash flows used in the calculation should be disclosed. |
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Considerations
PM18
The following considerations and methodologies are to be used when determining performance measures:
PM19
Unitised basis versus NAV basis
In some countries, the performance of vehicles may be reported at a unit level. The guidelines have been developed on the basis that performance has been determined on aggregate NAV and cash flow basis.
GAAP
The methodologies described below assume that components of measures are determined in accordance with module 4 - INREV NAV, which is determined based on IFRS financial statements. Where this is not possible reference should be made to IFRS or local GAAP.
Dates of cash flows
Dates used for performance calculations should be based on cash flows between investors and the vehicle at the date as determined for accounting purposes. As a minimum, monthly and annual cash flows must be used however it is now common to use quarterly and daily cash flows where adoption would be encouraged, especially for open ended vehicles. For capital calls, the deadline of the capital call is to be used.
Open ended vehicles are subject to a potential constant in- and out-flow of capital. To accommodate for the large flows of capital, cash flows can be rolled up periodically, ideally on a monthly basis to the end of each month.
In the case of distributions for unitised vehicles the declared date should be used.
Closed ended vehicles should apply the dates where cash flows are called or distributed to investors. The date should reflect the effective date for capital calls where the capital should be paid in and for distributions where the capital was paid by the vehicle.
Valuation of properties
Property should be valued in accordance with guidelines defined in module 3 – Property Valuation.
Fees
Vehicle level performance measures may be calculated on three main levels:
- net of both management and performance fees (required);
- net of management fees (as defined in module 6 - Fee and Expense Metrics), but gross of performance fees (carried interest) (optional);
- gross of all management fees (optional).
Performance measures are computed net of all fees and any materialised carried interest (or any other kind of performance fee) and forecasted future (provisions for) carried interest payments. However, fees charged to investors as a result of the redemption of units or exit to/of the investors should not be considered when they are earned by the managers rather than the vehicle. Even though not required, performance measures may also be computed gross of management fees and carried interest payments.
When fees are charged to investors outside of the vehicle, performance measures should include these fees as if the fees had been billed directly to/inside the vehicle.
Currencies
Default performance should always be calculated in the vehicle denominated currency in order to reflect the true performance of the vehicle.
PM20
To illustrate the combined performance of multiple vehicles, composite performance maybe presented which combines the performance of each vehicle in a standardised way over time.
Grouping criteria
To ensure fair representation of composite performance, vehicles included in the same composite must share one or more common attribute.
Composites should be defined by common attributes. A suggested hierarchy of grouping criteria is provided below:
- Style (please refer to the INREV Style classification paper, not manager defined);
- Structure (open vs closed ended);
- Strategy;
- Points of reference;
- Leverage.
For closed ended vehicles composite performance should preferably be defined by the combination of vintage year and one of the above mentioned attributes.
All vehicles (both historic and live) in a manager’s track record must be included in a composite if a vehicle matches the grouping criteria. Where a vehicle matching the grouping criteria has been excluded from the composite, reasons for doing such is disclosed.
Calculation methodology
Time weighted return composite performance should be calculated by weighting the performance of each participating vehicle or segregated account with its share of the total composite’s size. The weighting is done at the same frequency as the valuations of the vehicles and time weighted.
For closed ended vehicle composites a since inception IRR is presented. As cash flows of vehicles participating in the composite are all sharing common vintage year and attributes, aggregating cash flows do not constitute a problem.
Further considerations for multiple computation
Some vehicles have the ability to recycle capital during the investment period (to reinvest returned equity capital). For equity multiple calculation purposes, any distributions that are included as a return of equity or return on equity for the purpose of the calculation (‘nominator’) should, if reinvested (recycled), also be added to the amount of drawn capital (‘denominator’) to give a fair reflection of the true ratio of returned equity to investors. This should be the case whether the recycled equity is actually distributed and recalled, or reinvested direct by the manager without physically distributing back to investors (to eliminate the back-and-forth flow of cash).
Updates
PM-U01
The latest update: November 2015