The rise of new global and market-specific indices will increase transparency for investors. But is there room for all of them? Christine Senior reports
A number of developments in indexing and benchmarking suggest that real estate is maturing as a global asset class. Investment Property Databank (IPD), which is well established in Europe, has teamed up with the Pension Real Estate Association (PREA) to launch a real estate fund index for the US and is working to produce a global index. INREV, the European non-listed real estate association, has increased the frequency of its European fund index and has joined forces with its Asian counterpart ANREV and US association NCRIEF to launch its own global fund index.
There is more. Thomson Reuters has teamed up with Partners Group to launch a global index focusing on closed-ended private equity-style property funds, while in Asia it is working with Global Property Research (GPR). IPD has launched indices for the German Spezialfonds market and for the UK residential sector. INREV is exploring the possibilities of launching opportunistic and real estate debt fund indices.
Real Capital Analytics (RCA), which hired Simon Mallinson from Invesco Real Estate at the beginning of the year to spearhead its European expansion, is planning to replicate its transaction-based, repeat-sales property index which it has already established in the US with Moody’s.
Thomson Reuters has also teamed up with the Asia Pacific Real Estate Association (APREA) to produce a 13-market index of listed property companies in the region. FTSE and NAREIT have together launched an investable sustainable REIT index and, while S&P Dow Jones and Townsend Group are establishing a core US REIT index.
So what is behind this recent expansion? One of the most powerful catalysts has probably been the growing demand for greater information and transparency from investors in the wake of the global financial crisis and subsequent market downturn. Investors now want to know more about not just how their investments performed but why they performed in a particular way. Understanding risks figures more strongly in their concerns.
Peter Hobbs, senior director, group business development, at IPD, thinks it is partly down to the growth of the fund market over recent years and the effects of the financial crisis. “I think the financial crisis raised lots of questions about the fund model,” he says. “Back then investors were concerned about liquidity, about counterparty risk. They invested in these funds and they wanted to know more about why they were performing the way they were.”
Michael Keogh, senior investment and economic analyst at Henderson Global Investors, also points to the impact of the crisis. “I suppose it’s demand from investors to see more clarity in what they are being benchmarked against,” he says. “In terms of new funds being launched, [investors] want to make sure there is a more rigid process in place to understand who their funds are being marketed against, but also to understand performance. It’s coming after three or four years of changing times. Ultimately, there is a lot more pressure on valuers to show more transparency in the market place.”
Technological advancement has allowed more precise calculations and detailed models to be created. “There is the technical ability to put these things together,” says Greg Mackinnon, director of research at PREA. “For transaction-based prices, there have been a lot of advances in statistical techniques and information gathering to be able to create those indices.”
The launch of the INREV/ANREV/NCREIF global index for private real estate funds is still some way off – 12-18 months were initially envisaged when the initiative to combine the existing regional indices was announced in October 2012. A working group is busy smoothing out differences to come up with a common methodology.
Obtaining consistent data from the three organisations is a challenge, more so in relation to NCREIF, since INREV and ANREV both follow the same model. Casper Hesp, director of research and market information at INREV, points to one particular issue. “NCREIF presents an investor return where INREV presents a fund return,” he says. “For core funds that won’t make a big difference, but for some funds – for example, with opportunistic funds with co-investment from fund managers – that can make a difference. That’s one of the small technical issues we need to solve.”
The prospect of a global index has been widely welcomed, says Hesp. When the index was announced at the ANREV conference in Hong Kong, feedback from the audience suggested it would benefit the whole real estate industry. “If you have a global index available it means you have more transparency for the industry, and that could eventually attract new investors and attract more capital,” Hesp says.
Partners Group, in association with Thomson Reuters, has its own global private real estate index covering closed-ended value-added and opportunistic funds. It covers 300 funds from 60 firms.
Michael Studer, partner and head of investment services at Partners Group, explains why the index is limited to the non-core end of the fund spectrum. “There were already several data providers for core indices, whereas there is only sparse data available that covers the non-core private real estate,” he says. “We have concentrated so far in non-core investments as we saw the biggest gap in this space.”
An addition to the range of indices covering the US – the market already has the well-established NCRIEF Property Index, for example – is the PREA/IPD US Property Fund Index. It allows investors to access performance data at both the fund level and on the fund’s underlying real estate investments, breaking down the headline number into various components.
“You can see how much leverage the funds added to returns, what kind of cash drag there was, the effect of fund costs, other investments, etc.,” says Mackinnnon. “It gives a more detailed view of what drove the fund return.”
The launch of the index has been preceded by six months of consultation with users in order to get industry feedback on the format of the new index, such as the kind of funds included. IPD has worked with PREA and an advisory group of pension funds and others to develop the product.
“The agreement with IPD allows PREA members to have access to significant amounts of data they wouldn’t necessarily have access to otherwise,” says Mackinnnon. “We think this index will increase transparency and draw capital into the asset class. The level of detail allows investors to potentially create bespoke benchmarks. Because the effect of leverage is broken out, if you happen to be an investor investing without leverage, you can simply take that leverage effect out of the index and get a proxy for an unleveraged return.”
IPD has fund indices in nine countries in Europe, but the one which bears closest resemblance to this new US index is the Pan-European Property Funds Index (PEPFI). Launched at the end of 2011, PEPFI covers funds with a mandate to invest across Europe. It is relatively small covering 16 funds worth some €10bn, while the PREA/IPD index currently covers 21 funds worth closer to €70bn.
Plans for a global index along the lines of the IPD/PREA model are well advanced. A consultative index is due in March or April this year. It will consist of 150 or so broadly similar funds, which will show how both the funds and their underlying properties have been performing.
It is far from an easy exercise. “The nature of funds and the definitions are different from country to country,” says Hobbs. “There will always be that limitation but there is this desire for more of a global benchmark.”
Is the market big enough for the both of us?
A new transaction-based, repeat-sales index for the UK from RCA, a companion to the US version that came out in December, is also launching this spring. The index only covers properties that have changed hands more than once during its period of coverage to show changes in market pricing. The methodology includes a mechanism to take account of increases in size or capital expenditure on the property.
The UK, a liquid and transparent market, is the first step; eventually it could be extended to other European markets. But that poses some difficulties says Joe Kelly, director of market analysis at RCA. “We’re looking at repeat-sales transactions so we need properties to be trading, we need markets to be liquid. These indices can’t be developed for every market, for example more non-transparent markets across Europe.”
By its nature a transaction-based index has limitations: it can only provide data covering an active market to provide a meaningful view. Mallinson adds: “When we consider how we can break down an index, we are looking at markets where there is a good deal of liquidity, where we have a constant flow of transactions. We looked at the UK and we are considering breaking it down by London office, West End and City offices; then maybe nothing else for the UK because we feel there isn’t that volume of data to do anything we feel is robust.”
A transaction index responds more quickly to market events than a valuation index, says Mallinson. “The transaction index would reflect events quicker and probably in a greater degree, because it would be more affected, whereas a valuation index takes into account a lot of other comparable data and there is slightly less impact.”
Mallinson is keen to stress that a transaction index is just one source of market information, and has a role to play alongside traditional valuation indices.
“Valuation indexes many countries require a valuation which can be annual, may be biannual, but rarely quarterly,” he says. “Transaction indexes can be used as a complement to give the best intelligence to someone trying to make an investment decision, either to buy or sell in a particular market.”
IPD’s transaction-linked indices in Europe already take account of market transactions by comparing actual sales prices for properties sold with valuation prices. Hobbs says the value of a transaction-linked index is that it shows market volatility.
He says: “It’s not as robust as the appraised index, because it doesn’t cover as much of the market. It might only be 5% or 10% of the market that gets transacted. But it gives a good indication of how volatile the market is. It’s useful for risk managers who are concerned about volatility.”
While a transactions index may be hailed as giving a truer reflection of real estate values than a valuations index, not everyone is convinced. It’s argued that actual transactions represent only a snapshot of what is happening in the market at one particular time.
Richard van Ovost, global head of real estate investments at Mn Services, says: “The best thing for non-listed real estate investors is a non-listed benchmark, but you must have enough samples to form that benchmark and transactions are only one part. I’d rather have fund information than transaction information. If you have a valuation of existing funds that is for sure a reflection of the market situation, because valuers are basing their valuations on exactly what is happening in the market place and transactions are just one element.”
Another new index, in the listed sector, is the Dow Jones Townsend Core US REIT Index. Launched in December, this focuses on core property, so includes sectors such as office, industrial, residential, and retail. Michael Orzano, associate director, global equity indices at S&P Dow Jones Indices, says the index should be a more stable, less volatile version of a traditional REIT index. “It’s designed to be more representative of the direct real estate portfolios that are typically held by institutional investors, but it is composed of liquid publically-traded securities. It excludes REITs that primarily invest in hotels, manufactured homes and so on. The reason those property types are excluded is that they are focused on shorter-term leasing.”
The creation of more and more indices begs the question: will they all survive? Are they all complementary or are they competing against each other?
Take the proposed INREV/ANREV/NCREIF global index and the Partners Group global private fund index. Hesp says they will not be in competition because they are different. INREV wants to show the performance of all non-listed real estate funds. “We collect close-ended, open-ended, single-country, multi-country fund data; we put it in one index. Members have the possibility to split a sample into what they would like to see. I see that as a different product than, for example, the Partners Group [index], which is focusing on closed-ended funds.”
Hobbs thinks the proliferation of indices is a positive sign. He cites the fund area: “Our focus is mainly on the core funds, but they behave differently to opportunistic funds where the focus is on vintage years and IRR. You have different types of fund index as well. I think it’s really positive for the market because there are more tools there for people who are trying to understand the market. More insight is provided. ”
And where new indices fill gaps where there was previously a lack of information, it can only be for the good. “Historically, no global index was available for non-core private real estate investments,” says Studer. “Our initiative and these other initiatives aim to close this gap giving often complementary information. Time will tell whether all initiatives will be sustainable in the long term.”