The required improvements to non-listed fund data and benchmarking are inmanagers' own interests as, Lisette van Doorn explains
The initial raison d'être for the foundation of INREV in 2003 was to establish the European non-listed real estate funds sector as a distinctive and coherent investment asset class in its own right. While we have come a long way in laying down common standards for areas such as reporting and corporate governance, we have a lot more to do on the absolutely fundamental issues of market analysis and performance benchmarking.
To facilitate a depth of analysis that wouldn't previously have been possible in the industry, we maintain the INREV Vehicles Database, which covered 478 vehicles with a gross asset value of €326bn at the end of the first quarter this year.
We estimate this captures about 80% of the value of the non-listed institutional real estate funds market in Europe, but the quality and timeliness of the data vary widely as a source for investors and consultants to compare the investment opportunities offered by individual funds in terms of size, strategies and performance.
At the moment, roughly 60% of the data has been updated during the previous 12 months, meaning 47% of the data is more than a year old, and this is absolutely not acceptable.
The database is still mostly about static information - size, strategy and current allocations - and as most of the funds are closed ended, the numbers don't differ a great deal from quarter to quarter. However, as fund level information grows, consistency will become even more important and we aim to ensure that 95% of vehicles data is updated at least on an annual basis.
In addition to our funds database, we publish the INREV Index annually, which measures the performance of European non-listed real estate funds. Currently, the performance figures are provided on an aggregate level, with the opportunity to drill down to sub-index level, providing insights into, for example, country, sector and leverage level performances.
However, in order to build a robust benchmarking tool and achieve accurate performance attribution, INREV is dependent on the accuracy, comprehensiveness and frequency of the data provided by fund managers. Going forward, fund level performance is needed to be able to compare real estate funds with other asset classes, such as bonds and stocks, and for investors to carry out performance attribution.
I compare this with the traditional equity funds world, where benchmarking is common practice and you don't exist if you don't publish your returns in a market where everybody measures themselves relative to a benchmark.
The key lesson to be learned from this is that there is always a story related to a performance figure and as long as the story is consistent with the return number, investors are willing to stay invested. The problem arises when no return is published. Then investors fear (and probably rightly so) that the manager has something to hide.
The 2006 INREV Index now covers 206 vehicles with a net asset value of €153bn, and we are working to make this a robust benchmarking tool.
One of the most important initiatives in this respect is that we are currently working with the industry to agree a common approach to the calculation of NAV. INREV has already established guidelines on definitions of common fund characteristics.
Geographically we have particularly good coverage of the index in the UK and the Netherlands and have made some real progress in France, but southern Europe is limited and we need far more input from institutional fund managers in the important German market where awareness of INREV and its objectives needs to be raised. I am happy to note, though, that we have just registered our 250th new member, who is one of the top 10 German investors.
I think we're quite some way from being able to create derivatives on the INREV Index, though the huge interest in property derivatives in the market could drive this development forward faster than we expect.
A more immediate driver in improving the overall quality of INREV data could be the requirements of the non-listed real estate multi-manager funds, as quite a number of these were launched in the second half of 2006 and this year.
During INREV's annual conference in Madrid in April, I asked whether the industry could continue to produce the very strong performance of the past few years, with the index showing an average industry return of 20.9% in 2006.
I said I was worried about what could happen to the industry when the market turns, but the best way to counter potential capital withdrawals and competition from other investment asset classes is through transparency.
If investors can see and understand the story behind a downturn in performance, they are far more likely to keep their faith in non-listed real estate funds as an industry, in the same way they would with an individual manager who is open about the factors driving his fund.
Therefore I urge managers to provide us with their fund level data in a comprehensive and timely way. This will not only lay your wares out before your institutional investor client base on the INREV platform, but also put the non-listed real estate funds industry on the same footing as other major asset classes in the global investment world. INREV's aim is to help the industry develop progressively from an alternative to a mainstream asset class that is here to stay.
INREV also asks its investor members to encourage fund managers to contribute data to the index for the benefit of the industry as a whole.
Lisette van Doorn is CEO of INREV, the European Association for Investors in Non-Listed Real Estate Vehicles