The reporting best practice Non-listed funds' transparency improved strongly last year but there is still room for improvement. Andrew Mituzas reports

The reporting of European non-listed real estate funds improved significantly again last year, as outlined in the recent INREV review of reporting best practice.

In a sign of an industry-wide embracing of the INREV reporting standards, the review of a sample of European non-listed property funds' 2009 annual reports shows that 98% of the annual reports had adopted more than half of the INREV Reporting Guidelines. Adoption of an even greater percentage of these INREV Reporting Guidelines has also improved, as 60% of funds in the survey applied at least three-quarters of them.

The near universal adoption of the majority of the guidelines is a marked improvement from the 81% level seen in a review of 2008 annual reports, and the 72% level in 2007.  These results reflect steady progress toward adoption of the guidelines in each of the three years that the INREV Review of Reporting Best Practice has been conducted. Adoption of three-quarters of the guidelines has similarly improved in each of the past three years, climbing from 20% in 2007 to 43% in 2008, and reaching 60% in the 2009 review of annual reports.

Adoption of the guidelines has been a major goal for INREV, as part of its broader efforts to improve transparency and best practice in the real estate funds industry. The guidelines provide investors and fund managers with an integrated set of principles, best practice requirements and recommendations for corporate governance and information reporting for non-listed real estate vehicles.

The steadily increasing percentage of funds complying with the guidelines is encouraging evidence of the success of the association's efforts in recent years. "We're pleased to see that non-listed real estate funds are adopting the best practice guidelines in increasing numbers," says Matthias Thomas, CEO of INREV. "The results of the review show that market practice in Europe is moving toward a more common, consistent and transparent approach for reporting, which allows better comparability between funds."

Thomas notes that widespread adoption of the guidelines also creates a common standard for reporting, which opens up the non-listed real estate funds sector to further investment through improved transparency.

Despite the overall favourable results, the review also pointed to some areas needing improvement. "We see where we need to focus our efforts," Thomas says. "There has been really good progress in adopting the guidelines' best practice recommendations in the management report and financial report, but we need to do more in property valuations and fee metrics."

Thomas notes that almost 100% of the funds in the sample now comply with the majority of INREV's best practice recommendations regarding the management report and that 85% of the funds now comply with at least half of the recommendations concerning financial reporting. And although good progress has been made in the disclosure of adjusted net asset value (NAV) calculations and INREV NAV, there are still a variety of ways used to disclose the economic value of a fund covered by IFRS or local accounting standards.

"In the future, we hope to see more funds disclose the rationale for applying or not applying recommended INREV adjustments to NAV calculations using the INREV NAV table," Thomas says. "But we hear from a lot of fund managers that they're already working on their 2010 annual reports and are calculating INREV NAV, so we're confident that more fund managers are moving in this direction."

Disclosure of fee metrics is another area where Thomas hopes to see more funds -applying the reporting best practice recommendations. He points out that only 16% of the funds in the review disclosed a total expense ratio or other fee metrics-related items, which was the same level seen in the review of 2008 reports. He adds that INREV had expected that disclosure of fee metrics would increase in reporting to stakeholders, not just because of changing market circumstances, but also as a result of further general standardisation of reporting. "So that will be a primary area for us to focus on this year," he states.

The survey reviewed 52 non-listed property funds to examine current market practice in fund reporting and to assess how it relates to the guidelines. As in previous years, the review, conducted with assistance from Deloitte, concentrated on property valuations, NAV, fee metrics and annual reporting of funds, along with the funds' compliance statements in relation to the guidelines.

Andrew Mituzas is operations and professional standards manager, INREV