IPD's efforts to bring transparency to Asia's real estate markets are paying substantial dividends but there is still much to do, as Kevin Swaddle reports

The process of exporting a successful Western business model into Asian markets is not without its challenges. Asian markets each have business practices that might at first seem esoteric, but which must be learned, respected and followed.

Our objective is clear enough: to establish a valuation-based market index to improve transparency for investors. But there have been many hurdles to overcome to get to where we are now.

At its very core, the IPD business model is rooted in trust that we are able to protect the confidentiality of property data that is shared with us by the owners of the assets. A quarter of a century ago, the founders of IPD persuaded private property owners to pool their confidential data; we keep it confidential in that we only release aggregated results, so that the whole industry benefits from market-level transparency, while private measurement and reporting services remain just that, private. It is an act of cooperation between landlords - institutions and other traditional real estate owners - without which IPD could not have got off the ground.

In markets similar to the UK, this model has been welcomed and the transparency it has brought has been received warmly. But not all markets operate in the same way and not all markets have the same willingness to open their books to a third-party data provider; we cannot expect everyone to share our view.

While some organisations in markets such as Japan, Hong Kong and Singapore have embraced this form of market measurement, there has been reluctance on the part of some leading players to release this data.

As a result we are still some way off a ‘proper' IPD Index. However, we have managed to publish a credible piece of research that is an effective stepping stone along the path to that goal.

This research, the first of its kind, draws on property valuations for 3,363 assets with a total value of US$169.8bn (€125bn) based on pooling real estate data from Japan, Hong Kong, China, Korea, Malaysia, Singapore and -Thailand. According to the research, published last October, the unleveraged local-currency total return on Asian commercial property was -0.2% in 2009. This headline return comprised a -5.4% capital return and a 5.5% income return.

In the remainder of this article, I will outline the challenges we encountered in establishing a pan-Asian index and the steps we took to overcome them and conclude with some thoughts on where we go from here.

Challenges in accessing data
Accessing the data is more challenging in Asia. Many managers in the region are naturally cautious about passing data to a third party, even when there is an absolute guarantee that the details of their own portfolios will remain confidential. It is also a case of ‘chicken and egg' - some are prepared to co-operate, but don't want to be the first to do so.

The data on which our calculations are based are sourced directly from the building owners. As a result of this the data is of the best possible quality, but it is also harder to collect. Property-level indices are much more difficult and time-consuming to produce than indices based on share prices or NAVs. Generally, there is little we can do if the investors and managers are unwilling to pool their data in an IPD system.

The growth of the listed REIT sector in Asia has helped some managers become accustomed to the idea of greater openness, and much of the data we need is in the public domain. However, REITs in some countries are more transparent than they are in others. There is still a lot to do, and some of the data we have used in this research is less complete than IPD would usually demand. Nonetheless, this is a very significant step forward.

The new Pan Asia returns come with some important caveats and might be subject to future revisions. Although IPD has employed its standard calculation methodology, some public domain input data from Asian REITs have been incorporated. As a result, some assumptions have had to be made to complete the IPD core data fields. About 25% of the data used in the IPD Pan-Asia Return Research does not meet IPD's usual rigorous standards.

Robust standards pay long-term dividends
Our strategy in Asia has two distinct strands. We are working with international and regional investors to measure the performance of their properties wherever they happen to be located, and we are working to establish groups of domestic investors in individual national markets. This has given us a core of properties throughout the region.

Crucially, the addition of the new data from the REITs has allowed us to make full use of the other data we hold, which we could not otherwise use because it is concentrated in a particular ownership or geography and would contravene IPD's confidentiality rules.
Over the longer term, our objective is to increase the proportion of data that meets full IPD index standard; this can only be achieved through the recruitment of direct data contributors, to the point where a proper index is publishable.

Where do we go from here?
Growing Asian economies are going to make up a much larger proportion of global GDP than in the past. Global real estate investors will need to gain exposure in order to mirror this growth. While lack of transparency does not worry opportunistic investors, the absence of good indices and comparative market metrics is one of the things that has discouraged long-term institutional investors from taking a stake in Asian property markets.

Greater transparency - and these numbers are just a start - will make the markets more attractive to institutional investors investing equity from Europe and the US, as well as supporting the growing level of intra-Asia investment. The presence of more long-term institutional capital should in turn help make the Asian markets more stable. More transparent markets attract higher levels of capital at lower levels of risk, which benefits everyone in the long run.

The publication of the initial research explained in this article would not have been possible were it not for the existing level of transparency that has percolated through Asian property markets. The next evolutionary step forward is to publish the 2010 Pan-Asia returns as early into this year as possible - and we are confident of achieving that before the end of the second quarter.

In the next release of this research, it is intended to extend our coverage by including data from Taiwan as well as an improved data sample from China. The more timely publication of the results will ensure they can be adopted as an effective Pan-Asian performance yardstick for investors.

Kevin Swaddle is managing director at IPD Asia