With the market conditions still difficult, it is encouraging that the standard and consistency of reporting European non-listed property funds continues to improve, as Andrea Carpenter explains

INREV's latest ‘Review of Reporting Best Practice' shows that adoption levels of its reporting best practice guidelines rose for the reporting year 2008, compared to 2007. The result showed that 81% of those surveyed adopted the majority of the guidelines, as against 73% the previous year. The proportion of funds applying at least three-quarters of the guidelines rose even more impressively, from 23% to 40%.

The results are a sign that the market is moving towards a more common, consistent approach for reporting. Improvements have been notable in important areas reflective of the demands for further information in the current environment such as valuations.

The second annual INREV review is based on a survey of 60 non-listed property funds which were examined for their reporting standards, particularly as they relate to INREV's fund reporting guidelines. The guidelines have been developed since 2005 and were integrated into one set in 2008.

Unlike last year, his year's review also looked at property valuations and fee metrics. However, annual reporting formed the core of last year's review, and provides the main basis for assessing improvement over the year.

For valuations, which have become a highly sensitive part of fund reporting through the market downturn, the survey found that improvements have been particularly noticeable in the disclosure of adjusted net asset value (NAV) calculations. Nearly one quarter of funds surveyed stated that their adjusted NAV represents INREV NAV or is based on the INREV NAV Best Practice Recommendations.

Improvements in disclosure were evident for both the market values of the properties contained within the funds and also the adjustments from gross to net asset value. Greater transparency in market valuations may result from the more standardised reports that have followed specific GAAP disclosure requirements - as well as the effect of adopting of the INREV property valuation guidelines that were launched in October 2008. But the level of information provided on development valuations remains relatively weak.

The improved disclosure of the calculations used by funds to reach their adjusted NAV reveals that there are a variety of methods used to make this adjustment. This in turn means that there is not yet widespread comparability in the reporting of NAV between vehicles.

Of the 60 funds in the survey, 23 (38%) provided an adjusted NAV in the latest survey, as against 27% the previous year. The INREV-defined NAV adjustment is being used by 14 of the funds, although the survey found that not all of the elements specified by INREV are being disclosed.

The information reported on fee metrics shows that there is room for improvement, with just 16 of the 60 funds surveyed disclosing a total expense ratio or other fee metrics-related items. The template provided by INREV for stating fee metric calculations is being followed by just three of the funds covered, though it should be emphasised that this template has only been in existence for just over a year.

Improvements in non-listed funds' annual reporting over the past year have been witnessed across the range of issues covered in the survey, as highlighted in figure 1.
The strongest adherence to the guidelines is seen for financial statements - for which 95% of the reports included in the review disclosed a full GAAP financial statement - and general information, which relates to the governance, domicile and investment maturity of the fund. In this area the information provided on investors' monetary commitment to the fund has improved significantly, with nearly 100% adherence to the guidelines.

The biggest improvements over the year were in financial reporting and property reporting. INREV's best practice guidelines on financial reporting encourage funds to include a review describing the main features of their financial performance. The main features to be disclosed cover the NAV of the fund and its debt structure, together with a risk analysis, which relates to interest rate risks, foreign exchange exposures and financial instruments.

The majority of INREV financial reporting guidelines are now being followed by 73% of funds as against just 35% for 2007 (see figure 2). Funds following core - rather than value added or opportunity - investment strategies provided the strongest financial reporting, with 42% of these funds meeting three-quarters of the guidelines, while the most recently launched vehicles (2007-08) showed stronger adherence than others.

The key elements required by the INREV guidelines in the sphere of property-level reporting relate to valuation changes, investments and divestments, rental growth and voids. Here again there has been a significant improvement over the year, with a rise of 25 percentage points in the share of funds meeting the majority of the guidelines.

In terms of the individual INREV best practice recommendations on property reporting, the highest levels were recorded for disclosing gains and losses on disposals. The information provided on developments was also strong, with 88% of the reports providing a description of the development portfolio where applicable and the same percentage quantifying the amount of development being undertaken.

However, information on the income streams accruing to assets was rather weaker, with less than half of those surveyed providing commentaries on rental growth, lease renewal profiles or new leases.

For the first time, the review also covered the use of compliance statements by fund managers to report overall adherence to the INREV guidelines. It is clear from this review, and other anecdotal evidence, that compliance is becoming more important for the non-listed real estate fund sector. Only four of the 60 funds covered in this survey reported compliance on an extensive basis. However, this may be viewed as a promising start considering that the compliance framework was launched at the end of 2008, just before the reporting cycle.

The results show that the reporting improvements are positive. The affect of a transition stage means that in some cases funds provide information for investors in parallel with their existing approach. However, the INREV Guidelines are still relatively new and this progress represents major steps forward in a short period.