INREV’s Performance Measurement Committee members Ray Adderley and Stafford Biddulph (representing UK fund managers) and Rob Courtens and André Bresser (representing Danish and Dutch investors) got together in Copenhagen to explain to IQ why it’s now so important for members to provide extended historical fund data for their non-listed real estate vehicles.
Since late 2015, INREV has been working with its members to extend the Quarterly Index back to 2005, from its current start date of 2010. Efforts so far have focused on providing fund managers with a simple and user-friendly template and explaining what each member needs to do in order to provide this additional information or to review existing supplied data for accuracy.
Each potential contributor is now being contacted individually to support the process. This has already started with the Management Board, Fund Manager Advisory Council (FMAC) and Investor Advisory Council (IAC) members, who are proving very keen to participate. However, the success of the project will ultimately depend on the remaining members following their example.
But why is it important for members to join what many might see as a backward looking exercise? The answer, in a nutshell, is that a longer index series is an essential step towards future proofing the non-listed real estate sector as a credible investment asset class.
Taking the Quarterly Index back to 2005 will give investors points of reference that are closer to those already available for equities and fixed income. Investors want to see a long and solid track record when making asset allocation decisions, and the historical data series available for non-listed real estate is currently much shorter than the equivalent for listed investments. In addition, the existing data series is not long enough for pension funds to use in asset-liability modelling. So an extended index will help increase the institutional appeal of non-listed real estate in an environment where weak data often leads to lower allocations to an asset type.
Over recent years, non-listed real estate has undoubtedly become more attractive relative to other assets, in part due to its growing transparency. INREV has played its part in this by crafting and presenting its fund indices carefully, at a time when the sector’s performance credentials have also looked increasingly attractive. A longer Quarterly Index time series will build on the performance record of the existing INREV Annual Index, confirming these trends even more emphatically.
A longer and more robust index series should lead regulators to recognise the importance of non-listed real estate as an investment sector, helping to boost pension and insurance fund allocations.
Taking the Quarterly Index back to 2005 will also be important from the viewpoint of regulation, as the risk models demanded by regulators must incorporate market data for each asset type included in the allocation framework. Non-listed real estate is no exception. A longer and more robust index series should also lead regulators to recognise the importance of non-listed real estate as an investment sector, helping to boost pension and insurance fund allocations. In addition, central banks are keen to get a better handle on real estate risks, and the understanding of the non-listed sector is currently weak.
Of course, future proofing the non-listed real estate industry is as much about its own internal development as how those on the outside see it. Fund managers have become increasingly convinced of the benefits of transparency, recognising that comparison to a robust index can help foster best practices.
With the extended index, members will benefit from more than 10 years of quarterly reference points for assessing performance, giving greater potential for comparison and analysis. These will be easy to access using the existing Index Analysis Tool, and reveal key measures like GAV, income return, capital return and leverage, which users will be able to adjust for comparability with their own levels of gearing.
INREV has already done a great deal to improve working practices across the non-listed sector, but longer-run indices will give members greater scope to identify how effective these changes have been in terms of performance outcomes.
For members concerned about the amount of effort that will be required in providing the historical data, we confirm that our focus is just on the most essential historical information, which should be accessible quite easily. As most have already submitted similar information for input to more recent years of the Index, we believe that systems will typically be in place that can also look further back.
Ultimately, building a longer Quarterly fund Index will be an important milestone along the path towards the Holy Grail for the measurement of nonlisted real estate performance – reconciling asset and fund performance. Achieving this will, in part, depend on establishing a comparable asset level index – see Katie Smith’s member profile elsewhere in this edition of IQ. In the meantime, we hope that members will recognise the great potential value of providing historical performance details on their funds and look forward to their support on this initiative.
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Ray Adderley is Chief Investment Officer at TH Real Estate;
André Bresser is Portfolio Manager at PFA Pension forsikringsaktieselskab;
Stafford Biddulph is Head of Performance at Rockspring Property Investment Managers;
Rob Courtens is Investment Strategist at Blue Sky Group