After many years of painstaking work, the INREV IRR (Internal Rate of Return) Index was launched in May this year. The IRR Index is the latest and a welcome addition to INREV’s index series – including the INREV Annual Index, the INREV Quarterly Index and the Global Real Estate Funds Index. But as a money-weighted return index it is unique, as all the others are time-weighted indices.
The new IRR Index, currently a consultation version, covers 191 closed end vehicles with vintages dating from pre-2002 to 2017. It gives investors in European non-listed real estate a new tool for comparing the performance of similar vintage closed end funds and allows them to compare their real estate investments with investments in other asset classes.
Internal rate of return measures the absolute growth of a fund and gives greater weight to those periods when more money is invested into, or taken out of, a portfolio. As a money-weighted measure of performance, the IRR can help judge if a fund’s cash flows are sufficient to meet its specific investment goals. And as an IRR excludes interim valuation points, while a total return time series does not, it is better suited as a performance measure for closed end funds.
The launch of this index marks an important step forward on the journey toward greater transparency for the non- listed real estate industry. But it wouldn’t have been possible without the ground-breaking work of INREV’s historical data collection project, which built up full performance histories for the 191 vehicles covered by the sample. This meant pasting together their entire history of day-dated cash flows, something that had only been available for a handful of these vehicles in the past. Much of the credit goes to the INREV team who were supported by the IRR Index focus group – Pavel Pavlov, Casper Hesp, Stafford Biddulph and Katie Smith – but the efforts of many INREV members in extracting this data were equally important.
The focus group also investigated how the IRR Index should be put together. An arithmetic (equally weighted) mean of individual vehicle IRR’s allows comparison across a group with the same vintage, while a pooled return, in which the raw data for each vehicle is summed, allows comparison with a hypothetical market of the same vintage. Given the different applications, the group decided to include both measures in the INREV IRR Index publication, as well as a number of other relevant measures, calculated in line with the INREV Performance Measurement guidelines.
What did the first edition of the IRR Index reveal? Well, among the 191 closed end vehicles spanning vintages from pre-2002 to 2017, younger vintage vehicles with a year of first close between 2014 and 2016 delivered the highest performance, with a pooled IRR of 16.9% and an equally weighted IRR of 16.1%. Meanwhile, vehicles that had their first close between 2005 and 2007 were the weakest performers overall, delivering an IRR of 0.3% on a pooled basis.
The consultation index is evenly split between core and non-core vehicles, the latter including both value added and opportunity vehicles. For those vehicles which had their first close between 2011 and 2016, non-core strategies outperformed core. And over this period, multi-country vehicles performed better than those with single country strategies, while multi-sector vehicles outperformed those focusing on a single sector. Diversification appears to have trumped specialisation for this money weighted measure of return.
As IRRs are primarily relevant to closed end vehicles, this new index will, at long last, provide both fund managers and investors with the ability to compare these funds, across various vintages, to a peer group and against their own internal target rates of return. Given that a large proportion of funds in the INREV universe are closed end, the addition of this index was an obvious step, but one that required considerable effort to achieve. INREV’s total return series will, of course, remain as relevant as ever, given the insight it provides into quarterly and annually valued market movements by country, sector and strategy.
Looking to the future, successive editions of the INREV IRR Index will be released quarterly, approximately three weeks after the INREV Quarterly Index. And further down the line, INREV plans to approach ANREV and NCREIF to discuss the possibility of combining the index sample with equivalent data from Asia-Pacific and America to produce a global IRR Index publication. This would follow the precedent set by the Global Real Estate Funds Index, where the same organisations collaborated in a similar way. Here again INREV is working to establish greater consistency across regions and make it more possible to compare vehicle performance globally.
About the IRR Index
The IRR Index measures the since inception internal rate of return performance of European closed end non-listed real estate vehicles.
The publication includes a snapshot report, a full report and an Excel supplement which includes detailed information on the IRR and equity multiples.