Benchmarking in private
Private real estate funds have grown rapidly in Europe in recent years with the size of the observable market approaching E200bn of assets. Private real estate funds now represent a larger constituency than Europe’s listed real estate funds. Growth has been driven by a number of complimentary factors:
q The trend for professional investors to outsource more of their property investment activities.
q Investors’ desire to back specialist management in sector focussed funds.
q They desire of investors to enhance performance through the use of prudent leverage on a portion of their real estate holdings.
q The desire to participate in ‘large ticket’ assets and emerging asset classes through collective investment vehicles to share risk.
Unlike public markets which enjoy a well established regulatory and reporting environment with a high level of transaction transparency, private real estate vehicles largely exist in fragmented and divergent regulatory regimes with limited regulatory reporting requirements and significantly lower levels of transaction transparency.
However, the size of the sector and increasing organisation of the professional investors who participate in it, has brought about the creation of INREV, the European Association for Investors in Non-Listed Real Estate Vehicles, whose goals are to promote greater transparency, accessability and professionalism within the unlisted industry.
An important part of INREV’s work has been the establishment of the INREV Performance Measurement and Benchmarking Committee with a mandate to establish suitable benchmarks for European investors to:
q Measure the relative performance of their indirect investments.
q Analyse the factors that contribute to variances in performance.
q Increase the overall level of market transparency.
The Committee aims to establish three levels of performance measurement: unleveraged property returns, leveraged fund returns (pre-fees and taxes) and net returns to investors.
The committee identified a number of areas that were likely to require consultation in the industry:
q What indexes would be of value to investors.
q The categories of funds eligible for inclusion (i.e. institutional versus retail funds; listed versus unlisted funds).
q The best mechanism for constructing country weightings within.
1) a continental European index
2) an all European (including UK index).
q The types of attribution analysis investors would wish to undertake utilising the benchmarks.
In order to address these issues, and to discover what other factors might be of concern to European investors, a detailed questionnaire was sent to the entire INREV membership consisting of nearly 100 organisations including real estate investors, real estate fund managers and advisors based in the UK, Netherlands, Germany, France, Denmark, Austria, Sweden and the US. (See table).
The responses were instructive. In every main benchmark category, the creation of a benchmark was regarded as quite important or very important by over 70% of respondents.
Investors were keen to see attribution analysis made possible in the traditional areas of geography, asset allocation, gearing and active management, but also expressed strong interest in being able to benchmark the effect of different management styles. The strong interest by 84% of respondents in the creation of manager style benchmarks has led to the establishment of a focus group to evaluate how the three primary styles (core, core plus, and opportunistic) should be defined and measured. The very wide range of overlapping criteria used by investors and managers to explain these three widely used investment styles poses significant challenges and it is interesting to note that North American efforts to find a resolution to the same issue have yet to reach a satisfactory conclusion.
A survey showed that the real estate funds industry was evenly divided on the merits of including funds specifically designed for retail investors, despite the fact that they will need to be included if meaningful benchmarks are to be created for the private real estate funds industry in Germany where this type of vehicle is dominant.
The survey showed a pragmatic attitude to including funds that had technical listings (ie primarily the Italian funds) on the basis that the funds essentially behaved as if they were private real estate funds with low levels of market trading and low volatility. Two thirds of those who participated in the survey were similarly pragmatic about the importance of legal structure, believing that it was not useful to create indices based on the legal entity used. This was a significant contribution to an issue that has been debated in the UK where funds use a variety of legal structures including limited partnerships and unit trusts.
Another issue which had the potential to create a wide variety of viewpoints was how best to approach the construction of an All Europe Funds Index. Here pragmatism again predominated with the favoured methodology being to simply include all reporting funds without market size adjustments.
As a result of the consultation process and a further workshop held with INREV members earlier in the year, the Performance and Benchmarking Committee is preparing a formal White Paper which will provide a recommended position on the outstanding technical issues (eg accounting, valuation, currency issues) and endorse the following rollout programme which has been developed in conjunction with IPD.
It is likely that the indices will be produced on an ‘unfrozen’ basis allowing the fund universe to continue to grow in line with market and participation growth rates.
The INREV Performance and Benchmarking Committee’s initiatives build on early pioneering work that created the ABN AMRO/IPD Real Estate Fund Indices for the UK and the Netherlands, and extends the geographic, size and scope to pave the way for a pan-European suite of benchmarks that will bring a new level of transparency and accountability to the European fund industry over the course of the next twenty-four months.
Phillip Rose is European Head of Real Estate for ABN AMRO, Chairman of the INREV Benchmarking and Performance Measurement Committee and a non-executive director of Hermes Property Unit Trust