What is the single most important issue investors look at when investing in a non-listed real estate fund? A recent INREV survey shows that investors put most weight on fund managers' track records - for understandable reasons.

However, although the track record can be seen as a measure of the fund manager's ability to deliver the promised performance, it is still very difficult to compare the track record and performance of individual property funds or to formulate a view on how the sector as a whole is performing. In order to be able to answer these questions, INREV publishes an annual index which tracks the performance of non-listed real estate funds investing in Europe.


What does the INREV index measure?

The INREV index was first published in 2005 and measures the fund level performance of non-listed real estate funds investing in Europe. Fund level performance measurement is a key differentiating factor for the index, as the approach takes into account the use of leverage and costs related to managing the fund. By doing this, INREV's index is differentiated from the traditional IPD indices, which are measured at a property level.

INREV's annual index now reports on 144 funds, representing a total net asset value (NAV) of €140bn and with a performance history going back to 2001.

The index is reported on an aggregated level, so that sub-indices for all samples with a minimum of three funds are reported. At the moment, the index reports a breakdown for countries (Germany, Italy, the Netherlands, Portugal, Switzerland, UK and multi-country) and for property sectors (office, retail, residential, industrial/ logistics and diversified). The index is calculated by IPD and also incorporates information from the HSBC/AREF Pooled Property Funds Indices for the UK country sub-index.

Participation in INREV's index is free to the fund managers and results of the index are made publicly available on the INREV website.


Why is it not a benchmark?

The ultimate goal for the INREV index is that investors can use it as a performance benchmark. However, while the index can already be used for making performance comparisons that were previously impossible, further work is needed before it is ready to be adopted as a formal benchmark by investors - for example as the basis for performance fee calculation or remuneration.

First of all, the index does not yet cover enough of the fund universe and, for some of the sub-markets currently covered, the samples are thin. For example, it is easy to agree that the three UK office funds that are currently included in the index probably do not reflect the performance of all funds specialising in the UK office market.

In addition, the index is currently unfrozen which means that the performance figures can be restated as new funds are included in the sample. Using an unfrozen benchmark might, for example, lead to less constructive discussions in situations where the benchmark is used to determine the performance fee of the fund.


inally, it must be noted that the index is compiled in an environment which includes a number of different fund jurisdictions and reporting practices, which places great emphasis on the data definitions applied to the index. INREV will therefore need to ensure that the index's data is reported consistently and that appropriate, clear definitions are provided to the fund managers who contribute data.


Additional sub-indices needed

In order to be genuinely useful as a benchmarking tool, the index must reflect investors' key investment criteria. As mentioned above, INREV's investment intentions survey shows that the fund manager's track record is the most important consideration. In addition, a fund's investment style (either core, value-added or opportunistic), its target location and target property sector are key factors.

At the moment, the index covers two of these variables, but does not reflect information on the investment style of the fund. Additionally, it is important to take into account the fund's launch year, so that investors are able to evaluate the impact of the J-curve effect and general market conditions pertaining to the performance of the fund.


o why not simply add new sub-indices based on the investment style of the fund and its launch year? The issue is not that simple, as new sub-indices can only be introduced as the coverage of the index improves. To give an example, it would take 315 funds to populate all the sub-indices if an investment style index were added to the existing framework of countries and sectors. Additionally, if the number of countries were to increase by just one, which is almost certain to occur, the required number of funds would increase to 360. Clearly, the introduction of new sub-indices will need to be balanced by widening the coverage of the index.


The road ahead

It is clear that the first step in enhancing the INREV index will be to further increase the coverage of the index and to both improve and clarify the associated definitions.

Two additional goals for the index are to report the performance of individual funds and to increase the reporting frequency.

A recent poll during an INREV workshop also revealed that 75% of the respondents believed that the performance of individual funds should be disclosed.

Interestingly, fund managers are the strongest supporters of this view, as nearly 90% of managers support reporting on fund level.

In terms of the reporting frequency, the first move is to report the index every six months and, potentially, to move to quarterly reporting as is currently done in the HSBC/AREF indices in the UK. The achievability of increased reporting frequency is determined by the frequency of participating fund managers' property valuations - but, especially in continental Europe, annual valuations are still the norm.

The next release of the INREV index will be published in April 2007. The issues highlighted above promise that the following months will be a busy period for INREV and IPD as the next index is compiled.

The INREV index summary is available at

Ville Raitio is research manager at INREV, the European Association for Investors in Non-Listed Vehicles