The UK’s representative body for unlisted commercial real estate funds has launched the 2007 AREF Code of Practice to govern the £40bn (€60bn) of NAV in 60 funds that its members manage. The 2007 Code updates guidelines to reflect changes in regulation and accounting practice and AREF’s growing membership.

We have launched the Code to reflect the broader scope of our own membership base, which has grown in terms of the number, types and value of investment vehicles it now represents and also to ensure that investors in our member funds are afforded the same comfort and security in terms of disclosure, governance and reporting as is required for listed vehicles. Whereas previously we spoke solely for property unit trusts, AREF membership is now open to all types of unlisted UK property collective investments schemes, a sector that we estimate to be valued at £60-80bn, more than double the size of the market for UK REITs.

The unlisted sector is often seen as being less transparent than listed real estate. The new Code provides investors in AREF’s member funds with a level of disclosure across key areas that is more than comparable with publicly quoted counterparts.

The Code aims to ensure that real estate funds, their investors and fund managers are provided with:

n Transparency;

n Consistency and comparability between funds

n Accountability;

n Standards of best practice;

n Consistent disclosure across funds.

Although AREF membership is voluntary, some investors, including many local authorities and other large public and corporate bodies, require funds to be AREF members before they are considered.

Unlike equities, when you buy real estate you have to manage it as well. Property fund managers are busy and AREF’s new Code has been written with them in mind. An easy-to-read handbook, it contains checklists against which compliance can be measured and reported to investors and all areas of minimum compliance are clearly highlighted. It provides a handy reference guide to good governance (management structures and responsibilities), operating a fund (valuations, fees, accounts format, etc), unit dealing and performance measurement.

The AREF Code is also useful for managers setting up new funds as it gives clear guidance on what needs to be disclosed to investors when launching and marketing the fund, and best practice in the operation of a real estate fund on an ongoing basis.

So what questions does the new Code help investors answer?

Who is responsible? What is the manager’s track record? Many investors say they chose property funds on the quality of the manager and that the first section of the new code, governance, facilitates comparison between managers. An investor wants to know what a fund’s strategy is, who is responsible (and accountable) for achieving that strategy and what the manager’s qualifications, previous experience and track record is. The Code gives investors clarity on the way management of AREF funds is structured and asks members to outline exactly who is responsible for asset management, stock selection and investment strategy. It requires a corporate governance structure to be in place and provides a standard format for naming all responsible parties and their advisors - valuers, custodians, solicitors and auditors.

Are the valuations correct? What fees are payable? The Code’s second section, operating the fund, covers two key areas: the basis of valuation and what information needs to be given to investors on fees, insurance rebates, gearing and derivatives.

All property valuations are to be at least quarterly, GIPPS compliant and to ‘market value’ basis as defined by the RICS Red Book. The Code gives guidance as to how the levels of gearing within a fund, as well as in joint venture vehicles, should be reported and provides strict guidelines covering the use and reporting of property derivatives.

Of utmost importance to investors is costs and fees (including performance fees) payable to the fund manager, when they are payable and how they are calculated. The Code requires that a fund must set out clearly in its original prospectus and its annual statement a breakdown of all costs and fees, which are both paid from capital and deducted from the income statement. Funds must also include a cost/income ratio calculation. They are also required to disclose their policy on insurance and service charge rebates - whether they are retained by the manager or distributed to investors.

AREF encourages all funds to achieve their financial objectives with a positive attitude toward social and environmental concerns and requires members to produce a public statement of their SRI policy.

Next to transparency, liquidity is the second most common issue raised by investors in unlisted real estate. The third section of the Code, Unit dealing and Performance, requires managers to provide details on the subscription, redemption and pricing policies of a fund, its unit turnover and disclosure of secondary market dealings.

The HSBC/AREF Pooled Property Fund Indices were launched over 10 years ago and provide quarterly total return and performance data on over 60 balanced and specialist funds. IPD, which compiles the indices, operates a strict methodology covering all index constituents to ensure apples-and-apples performance measurement and benchmarking. The Code encourages all members to be part of the indices, to submit their data accurately and on time and specifies that managers should only quote performance figures that can be substantiated by an independent measurement service or have been confirmed by the fund’s auditors.

Does the Code have ‘teeth’? The Code sets out two levels of compliance; ‘minimum compliance’, which must be adhered to by all AREF members, and ‘best practice’, which sets out ideal procedures. Members are expected to state clearly in their annual report and accounts where and why they do not meet minimum compliance and are required to include a statement in the form of checklist, detailing which level of compliance they have achieved for each criteria.

Rachel McIsaac is chief executive, the Association of Real Estate Funds