Investor needs for greater portfolio scrutiny is a challenge for the relatively opaque real estate industry. But it is one that is being met, says Simon Burgess
Real estate investors have long relied on quarterly key metrics, including exposure reports, yields and net asset values (NAVs) to manage their investments. However, since the financial crisis they have been scrutinising the performance of their investments even more closely and are demanding more detailed and frequent updates from their real estate fund managers.
Of the European real estate fund managers surveyed by State Street, 43% have seen a "very significant" increase in demand for reporting, according to this year's State Street European Real Estate Fund Manager Study, produced in partnership with Preqin.
Investors also want a broader range of metrics. Our research shows that gearing levels (the ratio of debt to equity) and industry performance metrics, such as total expense ratios, are the figures investors most want. They also want reporting to be more frequent. This shift in expectation was caused by the severity of the financial crisis, when portfolios - some more than others - were hit hard by the downturn. Reporting is likely to become more detailed in the coming years.
Many factors influence the attractiveness of a property investment, and hence the net income and capital value. Because every building or parcel of land is unique (and even very similar buildings can vary dramatically in value), there is a lot of information available which can be used to build a detailed picture of an asset, thereby assisting investment decisions and maximising long-term value.
Investors are not alone in demanding a detailed understanding of a fund's exposure to risk — regulators demand it, too. The good news is that the technology for producing performance analytics is growing more sophisticated and is allowing investors unprecedented insights into their investments - for example, determining their exposure to a particular type of tenant or retailer.
Information can now be examined in detail using analytics tools tried and tested in the private equity industry. One of the challenges for real estate investors has been accessing and aggregating information from multiple fund managers and third parties, especially given the volume of data.
Today, more powerful analytics tools allow this level of detail to be mined and analysed for the benefit of the fund's investors. These tools also eliminate the need for calculations (for example, calculating NAV variations per investor based on different levels of management fees) to be spreadsheet-based, which carries the potential for manual errors.
Other information, such as debt exposure at individual property or overall fund level, can also be viewed. For example, a report can be generated that allows an investor to aggregate the information of their exposure across multiple funds. As property is geared, both at property level and fund level, it can be a challenge for the investor to determine how much leverage is in the structure. Investors can gain a detailed picture of the ownership structure of a property holding, which can be complex.
Risk management has become a significant factor for investors, and fund managers find financial metrics valuable as they help them to meet their investment mandates. For example, a fund manager may need to abide by either a particular limit on the level of gearing in a portfolio or exposure to a particular sector, such as office, retail or industrial.
Furthermore, the tenant covenant - who the tenants are, what their business is and whether they are stable rent payers - is also an important factor in producing returns.
Tenant default risk became a major factor during the credit crisis: determining how much income is generated by a certain tenant - who may feature multiple times across a property portfolio - is important.
Customising data is key: a considerable amount of intelligence can be gleaned from ‘slicing and dicing' the information in a variety of ways.
Where there is risk, this information helps investors to decide what level is acceptable to them and how they will mitigate its affects.
The leading service providers in the real estate industry can offer technologies that aggregate data from all the underlying real estate assets in a fund and store it in a data warehouse for easy online access.
As investment analytics become more widely used across Europe, some of the most powerful and sophisticated investors are now adopting these technologies. Some investors and fund managers are producing their own investment analytics, using either bespoke or off-the-shelf technologies. However, fund managers may not have the available staff or critical mass to maintain these systems.
For this reason, institutional investors are looking to third parties to run the analytics on the their own systems.
Engaging an independent service provider helps to ensure transparent reporting, while larger funds also have the option of using the third-party information as a way of independently verifying their own data.
By partnering with service providers, investors and managers can avoid the ongoing costs required to ensure that their technologies remain up to date as the market evolves.
Simon Burgess is head of EMEA real estate services at State Street