Cider or vinegar?
Even as children we learn that it’s important to distinguish between apples and pears when making comparisons. In other words, only compare what is really comparable. This sounds quite simple and in fact it isn’t that difficult. But can you imagine how this would work if you did not know how to recognise an apple, not knowing how it would look and taste? That makes it difficult if you want to compare apples. This situation is quite comparable to the current state of the European non-listed property markets.
In the past 10 years, the real estate investment markets in Europe and in other parts of the world have shown impressive growth rates. Even more impressive has been the growth shown by the market for non-listed real estate vehicles. Virtually non-existent about 10 years ago, it has grown to a market of almost €300bn, when measured by gross asset value.
It all started with the increasing focus of institutional investors on risk management and consequently diversification. Especially after the equity market crash at the beginning of the new century, diversification was on top of all investors’ minds. In addition, due to increased focus on cost reductions and efficiency, investors increasingly concluded that the day-to-day management of their directly held property assets was not part of their core business. As a consequence, a new market started to emerge: the market for non-listed real estate funds. Obviously, the introduction of the euro has worked as a catalyst for the development of the market.
However, in the beginning, the growth of the market was not that impressive. One of the important reasons for this was the lack of information on products available, especially related to the risk-and-return characteristics to prove the added value in comparison with other asset classes. This lack of information held back the development of the industry for some years. It proved to be difficult for ‘real estate’ people to explain the added value of the asset class to their management and asset allocators.
The (partial) solution to this problem came as many parties started to collect all sorts of information on the real estate market. First of all, local and international brokers played an important role in this, through the collection of data on yields, rents, and so on. However, in some cases the data collection was mostly subject to their more important commercial goals. In addition, (mostly) national property organisations, such as IVBN and ROZ in the Netherlands and IPF in the United Kingdom, have initiated and supported many new initiatives, focused on increasing transparency in their national markets.
Going forward with market players developing a more international focus, international organisations started to emerge, such as EPRA and INREV. Especially for the organisations focused on the non-listed part of the business the provision of market information has been an important means to increasing transparency. For example, from the start, INREV has made extensive efforts in collecting information on non-listed real estate vehicles by building a database and constructing an index.
We’ve now reached the stage, stimulated by developments in other asset classes, where data is compared as if it always had been. Benchmarking has been fully introduced to the sector. Investors use the information to make investment decisions and select individual funds. Fund managers use the information to compare their funds with market averages and funds of other managers. Sometimes it seems as if the existence of an index and a benchmark have become a goal in itself.
But if we then look at common practice in other asset classes, such as equity and bonds, it is easy to notice that comparing fund returns with a specific index or benchmark is not enough. It is equally important to show which calculation methods have been used and what exactly is being compared. Internationally, the outline for these issues has even been agreed in specific standards: Global Investment Performance Standards. A company which commits to these standards, gives full clarity about how a specific return was constructed and which composite is used (geography, sector). Moreover, before one can show
the returns, a minimal history needs to
exist before the return can be calculated and presented.
And performance comparison is not an isolated case; there are several other areas which show the depth of transparency. Within other asset classes, transparency in costs and fees also receives a lot of attention, not only from the market participants but also from regulators and supervisors. Within the equity and bond fund markets, a ‘total expense ratio’ already exists, one metric to measure total costs and fees within a fund.
So within the non-listed property sector, we can start preparing ourselves for things that will come our way on the basis that other asset classes are already dealing with the issues.
Although we have already made considerable steps we have only just scratched the surface. The really big challenge yet to come, is to create more uniformity within the market for non-listed real estate funds and this involves one very important word: definitions. It’s quite a challenge, because we are not only dealing with national differences, but, due to the non-regulated nature of the business, with individual differences.
Large differences exist in definitions used, reporting practices, and so on between fund managers, investors, and advisors.
As an example, take the cost metric, where we have to decide which costs have to be incorporated. This doesn’t seem too complicated, but in reality it is. At first sight, one might say: all cost, but problems can arise when you compare property funds with other asset classes. Interpretations differ quite considerably and comparisons between property funds require carefully differentiated cost breakdowns.
It’s really not the case that everyone has to agree on everything, with the sector consequently losing its flavour and every apple becoming a Golden Delicious. Different flavours make the fruit appealing and will keep interest alive. However, it will become important for consumers and suppliers alike to recognise the ‘tastiest’ ones. What can be more disappointing than tasting vinegar when you thought you were taking a refreshing sip of cider?