Compared with the stock markets, that other great investment market - the real estate market - has been badly served in most European countries.
With a few exceptions, there is very little by way of benchmarks for commercial property in Europe. And investors - particularly investors from other countries - are often discouraged from putting their money where they cannot accurately measure and compare returns earned.
But property is not as easy to measure as shares or bonds. There are no quoted prices, and no one property is exactly the same as another. Compiling a meaningful index of rents, yields or capital values poses considerable problems.
Even in Britain, which has an active commercial property investment market and a relatively high level of institutional investment, there was very little by way of yardsticks for the market 20 years ago.
Measuring commercial property performance in Britain has followed two main routes. The first published and widely used index of rental values was introduced by the real estate agency Hillier Parker almost 20 years ago and was based on ‘rent points’: locations where rental values could be regularly monitored. It was followed in due course by indexes of investment yields and capital values for commercial property. It thus measured the trends of the market but did not claim to mirror the performance of a specific portfolio of properties.
The other approach was to take a specific portfolio of properties and construct an index by charting the performance of these properties. The main drawback was that the portfolios of properties that provided the sample were relatively small.
The problem of sample size was eventually overcome in Britain by the establishment of Investment Pro-perty Databank (IPD), sponsored by a group of mainly medium-sized estate agencies. IPD set out to persuade the UK’s major property owners - investing institutions such as insurance companies and pension funds- to supply details of the properties they owned for inclusion in its database and to update these details at regular intervals. It has been a considerable success. IPD’s database now includes details of some £55bn ($88bn) of commercial property in the UK, representing over 90% of the investing institutions’ commercial property holdings and a slightly smaller proportion of the pro-perty company holdings. Based on this mass of data, IPD can produce information on virtually any aspect of commercial property performance in Britain. Its figures for investment returns from property are widely quoted and its index of capital values is the accepted basis for the various property derivative products that are beginning to emerge in the UK.
Why did the institutional property owners agree to provide the details of their holdings? Even those which were not convinced at the outset generally came to see the advantages of having reliable yardsticks, plus the benefit of regular benchmark reports on their own portfolios which put their performance into context.
On the face of it, a winning formula such as this should be capable of adoption in other countries. In practice, it is taking considerable time. In the Netherlands IPD, in association with ROZ (an umbrella body for various Dutch real estate trade associations), has established a database of commercial property which covers the holdings of the big pension funds, insurance companies and open-end-ed investment vehicles. In sterling terms it covers some £10bn-worth of property which will be regularly revalued and this year will see the publication of performance figures for the second time. IPD also publishes an index for commercial property in the Republic of Ireland.
Holland and Ireland are the two European Union countries with a commercial property market that has most in common with Britain’s. Elsewhere, there are differences of culture which pose initial problems. The biggest problem is the question of valuation methods. In Britain an open market basis of valuation is normally used for investment properties, and the revalued figures are usually incorporated into accounts. The tradition of revaluing to market prices does not exist in most Continental European countries, where properties are more likely to be shown at cost or replacement values. So IPD (or anyone else) wishing to establish commercial property indexes in Continental Europe has two hurdles to overcome. First, it must persuade property owners to accept the principle of regular revaluations to market values, and second, it must persuade them to allow this information to be incorporated in a database.
Rupert Nabarro, IPD’s managing director, suggests the difference be-tween the British and Continental European approaches to property valuation stems largely from Britain’s traditionally more inflationary culture. Selling the ’open market value’s message may not have been helped by the world-wide slump in commercial real estate values in the early 1990s. Investment managers and bankers are not always keen to expose their losses. But Nabarro feels that there are arguments running in the opposite direction, too. In Britain, the discipline of regular revaluations meant that losses on property portfolios in the 1991-93 period were at least quickly recognised and necessary steps were taken. He feels that the leaders of the French property industry in particular might have welcomed a method of crystallising losses which, in the event, have continued to overhang the market and the banking system.
Either way, IPD’s plans for introducing measures of property performance in other Continental Euro- pean countries are moving ahead, particularly - with the help of local partners - in Belgium, Germany and Sweden.