IPD faces many challenges in rolling out its real estate indices in Asia. Building trust is one of its biggest, as Kevin Swaddle explains
About a year ago, I was asked to write an article for IPE Real Estate about some of the practical issues and challenges International Property Databank (IPD) faces in creating new property indices in Asia. Now, 12 months later, I have been given the opportunity to update and comment specifically on the way our work has been affected by the problems of the world economy.
IPD produces the performance indices used in most of the world's major property investment markets. We measure the performance of portfolios of assets and produce indices at the level of real estate, not to be confused with indices based on a vehicle's share price. Over the last quarter century, IPD has established databanks containing hundreds of thousands of assets, covering all the principal European economies, plus South Africa, Australia, New Zealand, Canada and the US. Seven years ago, we took our first steps into Asia, with the creation of a databank in Japan, and we currently have offices in Tokyo and Hong Kong.
The first point to make is that in the current economic climate the measurement of portfolios and markets is more important than ever. Transparency is always good for the efficiency and reputation of real estate markets, but when transactions dry up and values start to fall it is extremely beneficial to have a systematic way of monitoring the health of the market.
The index is there at all stages of the cycle, calling the turning points at top and bottom, telling investors where they are, and providing a permanent record for market analysts and forecasters.
In many of Asia's property markets, where there is not yet an index, market participants will have a vague sense that people were making money at one point in time and losing money at another. But there is no definitive record, comparable with the information available in the bond and equities markets, of the high, the lows and the turning points.
This might not have mattered much a couple of years ago, when capital was in plentiful supply and fund managers could pick which end-investors they wanted to work with. Now, the presence or absence of a comparable market index is the sort of factor that will influence global asset allocators in deciding which countries should share a smaller investment pot.
This is particularly true of institutional investors, who typically invest for the long term and are less likely to rush for the exit when times get tough. Managers with a good record on corporate governance and third-party measurement are likely to be at a similar advantage when it comes to the selection of individual funds.
Another point to make about the current economic situation is that it makes the numbers IPD produces on markets and for individual funds more interesting. There is a tendency for investors not to worry too much about performance, when everyone is doing well. What is a couple of hundred basis points when your manager is giving you returns in the upper 20s? But when returns in many parts of the market go negative, the differential performance of different sectors, funds and managers comes under much greater scrutiny.
Our index in Japan has now tracked a full market cycle, the database is now one of IPD's largest in terms of value, and the growth in the number of individual assets allows it to be disaggregated into numerous sub-indices. The fascinating thing about the recession so far is that different sectors and regions have experienced the slowdown at vastly different rates, which means the structure of investors' portfolios will have a big impact on the overall return they achieve.
Similarly, our databank in South Korea, which has just had its third annual update, has grown significantly since 2008. The sample of assets is becoming more representative and the index is starting to show distinct differences between the sectors. The preliminary numbers we published for Singapore towards the end of last year are at an earlier stage along the same road.
The greatest difficulty with IPD's index methodology is also its greatest strength. The fact that the raw data that goes into our calculations is sourced directly from the building owners means our information is of unrivalled quality, but this also makes it harder to collect. Property level indices are much more difficult and time-consuming to produce than indices based on share prices and, generally, there is not much we can do in a market if the investors won't help us.
The early work we have done in Singapore, for instance, will not progress if more of the managers do not agree to work with us. We can encourage and we can educate, but there is not much we can do to force the pace.
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 this has given us a core of properties throughout the region. As samples grow towards critical mass, we will consider breaking out individual national indices.
Last year's decision by ING Real Estate to become the first manager to measure the performance of its entire global portfolio has been helpful to us and has raised the bar in terms of reporting for other investment groups.
At the same time, we are working to establish groups of domestic investors in particular national markets. This is never easy, but more difficult in some places than in others. The fact that long-term investment funds have not developed in China means it is questionable whether there is yet a measurable investment market for us to track.
Market infrastructure is another issue. IPD returns are based on appraised values, so we need the portfolios we monitor to be marked to market on a regular basis and to a consistent standard. This probably means that an Indian index is some way off. Many people would like to have an index there, but the consistency and reliability of the inputs is in question.
Everywhere in Asia it is necessary to build relationships. In Korea, they have the notion of Chong, which is an almost emotional connection that exists between business partners. In China there is a similar idea, Jung, and in Japan there is Shinrai, which is closer to trust or reliance.
Partly, relationships are necessary to overcome the culture of secrecy that is found in many parts of Asia; partly, it is just the way business is done.
The IPD model is based on an absolute guarantee that we will respect the confidentiality of the data supplied to us, but it can take a while for people to become comfortable with this concept and the idea that our whole business is based on creating a relationship of trust. Kevin Swaddle is Asia Pacific director at IPD
Kevin Swaddle is Asia Pacific Director at IPD.