This first European regional focus on the Nordic countries for the launch issue of IPE Real Estate bears some interesting hallmarks. As well as Denmark, Finland, Norway and Sweden being significant real markets in their own right, with healthy institutional interest in property investment, the Nordic region is also the first to be considered as a ‘multinational’ property index on a regional basis by Investment Property Databank (IPD), the performance measurement and market analysis provider for the commercial real estate industry.
IPD’s aim since its establishment in 1985 has been to put property investment analysis on the same footing as other asset classes by providing reliable, objective and widely accepted measures of performance.
To this end, a consultation index for the Nordic area was undertaken using property results for calendar year 2002 to allow people from the industry to comment.
The data for the index will be updated later in 2004 to give the results for 2003. IPD produced the Nordic Property Index with the support of ED in Denmark, KTI in Finland and SFI in Sweden.
The total value of the properties included in the IPD Nordic Databank at December 2002 was e54.2bn.
The index measures the combined performance of investible real estate in the four countries, although at present the index is published purely for information purposes, not as a fully fledged benchmark for property performance in the Nordic market. More specifically, the index measures returns to direct investment in property and is compiled from valuation and management records for individual buildings in complete portfolios, collected direct from investors by IPD in Denmark, Norway and Sweden and by KTI in Finland (IPD-compliant data). All participants in the individual indices adopt a common approach to valuation in compliance with finance regulations in each country. The computation of the aggregated index requires estimates of relative market sizes for the four countries, together with conversion of the local currency valuation and financial records into common currencies.
The index shows annual time-weighted returns calculated by chain-linking monthly returns to capital employed for market standing investments. Standing investments are properties held from one annual valuation to the next. The market results exclude any properties bought, sold, under development or subject to major refurbishment in the course of a year.
In any given month, total return is the overall return on capital employed, and is the sum of income return and capital growth. Income return is income receivable net of property management and irrecoverable costs divided by capital employed in that month. Capital growth is the change in capital value from one month to the next net of any capital flows, divided by capital employed.
Capital employed is capital value at the start of the month plus half of any net capital flow, minus half of income receivable (ie, the calculation assumes flows of capital and reinvested income are throughout the month).
There are four fundamental stages in calculating the aggregate IPD Nordic property index returns:
q deriving monthly components of total return;
q reweighting local currency index data according to the sizes of the investible markets in each country;
q converting reweighted local currency data to a common currency;
q calculating monthly and annual returns.

Deriving monthly components of total return
The Databank structures for the four countries are based on annual valuations. IPD and KTI are moving towards a time-weighted measure of total return in all markets in 2004. The four individual annual databanks are being converted into monthly structures by apportioning the capital and income flows evenly across 12 months, and linear interpolation of capital values between year-ends. This provides the four components necessary to calculate a time-weighted total return:
q start- and end-month capital values;
q monthly net income;
q monthly net capital expenditure.

Reweighting local currency index data
It is necessary to reweight the four components to represent 100% of each market. IPD’s coverage of the investible market in each country is based on a ‘bottom-up’ estimate of the value of the mainstream professional investment markets. The ‘bottom-up’ estimate is the total portfolio value of existing clients plus the value of all known non-participating portfolios.

Converting the local currency indices into common currencies
The start- and end-month capital values, monthly net income and monthly net capital expenditure which now represent 100% of each market are converted into common currencies at the month end. Currency conversion has an impact on the local market returns as changes in values from one month to the next are partly the result of fluctuations in the currency rates in addition to local property market factors.
The aggregate Nordic index return in local currencies is calculated using a constant conversion rate for each month in a given year to exclude year-to-year currency impacts. The constant rate used is the respective year’s end-December rate.
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