Swedish insurance group SPP recently called a meeting of property analysts from domestic brokerage firms.

The idea was to sound out interest in the development in Sweden of commercial real estate indexes, which has been under discussion with the UK’s Investment Property Databank (IPD) for some time.

IPD pioneered the highly-regarded index of institutionally owned commercial property in the UK, and produces a range of performance measures and other information based on details of property holdings supplied and regularly updated by the vast bulk of the UK’s investing institutions. At present, property investors in Sweden have little in the way of performance yardsticks. SPP is strongly behind the idea and has been in discussion with 10 other (mainly institutional) investment groups. But winning hearts and minds may take a little time.

In Germany, things are a little further forward. A group of 16 large-scale property investors has commissioned a study on the feasibility of establishing a property performance measurement service. The institutions involved include eight of the open-ended property funds, together with insurance companies, multi-national investors and a pension fund. The study is being undertaken by Germany’s EBS Immobilien Akademie, the real estate offshoot of the European Business School, in conjunction with IPD.

Swedish experience to date illustrates both the advantages of developing real estate indexes and some of the problems that will have to be overcome. Kent Jonsson, chief valuer of SPP, lists several advantages. Pension fund real estate investors would have the performance benchmark they lack. Discounts on property-based investment vehicles might reduce if there were more confidence in the valuation basis. More capital, both national and international, could be attracted into Swedish property. And it would become possible to generate statistics on voids, rent levels and the like (though not all of this information would necessarily be published).

Unfortunately, creating a commercial real estate performance measurement yardstick in Sweden is not simply a matter of persuading the major investors to pool existing information on their real estate holdings. While Sweden has plenty of independent real estate valuers, it lacks a national valuation standard for property. Such a standard would need to be created before consistent information was forthcoming on which to base a performance index.

And there is little consistency at present in the way major property owners in Sweden approach valuation practice. SPP itself values all of its real estate on an open-market-value basis, using a discounted cash flow approach. Some 40% of the total is valued by external valuers. But it is probably the exception rather than the rule. Some property-owning companies have undertaken no valuations at all for years. And many are afraid of the costs. There is also the lurking fear that, if information on property holdings were made available on a confidential basis for construction of an index, it might become public in some way or another. Similar fears were expressed by property investors in Britain when IPD first opened shop, but the fears proved groundless.

Compared with Sweden, Germany starts with a number of advantages. In the first case the real estate open-ended funds are required to revalue regularly and to adopt what is viewed as a standard basis of valuation. This seeks to establish the Verkehrswert”, which is not far off the concept of market value. It is a combination of site value and investment value of the remaining life of the building. However, other types of German property investor - such as the insurance companies - are under no legal obligation to revalue.

A feasibility study is being undertaken with details of a sample of properties owned by the investing institutions. One of the aims is to see whether present valuation methods would provide a basis for performance yardsticks or whether a somewhat different valuation approach would be needed. Taking an optimistic view of the situation, IPD reckons that the feasibility study might be completed this summer with a view to moving onto a full service in the autumn. How soon performance figures could be produced is still open to question. A year’s worth of data is needed to measure movements in value and other parameters. If the property owners can produce historical data as well as current figures, delay might be eliminated. Otherwise there would be a year’s wait until annual movement could be measured.

Like Kent Jonnson in Sweden, Professor Shulte of the EBS Immobilien Akademie is in no doubt of the benefits for the German property industry of putting in place a reliable benchmarking system for property. In a recent contribution to the leading daily paper, the Frankfurter Allgemeine Zeitung, he argues that property in Germany has suffered relative to other forms of investment because of lack of information. He goes so far as to blame the relatively low levels of property holding among German institutional investors on the lack of a German property index.

Whereas past performance of equities and bonds can be reliably measured and reported, there are no reliable answers on past performance of property in institutional portfolios. Comparisons of returns between different asset classes, both nationally and internationally, are therefore impossible in the case of property. The development of a property index would, in Shulte’s view, increase the attraction of the German property market, particularly to institutional investors.

Improved information and the creation of benchmarks would also allow individual property investors to measure deviations from the averages in their own portfolios and to identify the reasons for them. And a property index would also open the way for the creation of property-based derivative investment products, Shulte points out, as is beginning to happen in the UK where IPD’s index figures are invariably taken as the yardstick.

It is not only in Germany that commercial property should be a prime beneficiary from moves towards the development of funded pension provision. The long-term nature of property investment makes real estate a particularly suitable asset class to match the long-term nature of pension fund liabilities. But only if it improves the transparency of the market, particularly via the development of benchmarks and of standardised valuation methods, can the property industry expect to get the business.