The way in which real estate portfolios are measured is evolving as the sector matures. Rachel Fixsen talks to six investors
• Big events can lead to valuation adjustments at any time of the year
• Investments must be steered to meet the needs of pensioners
Even though Danish labour-market pension fund PenSam makes valuations on all assets related to private markets at least annually, Carsten Grøhn head of alternative investments, says any big event during the year could lead to adjustment of interim values.
“We measure performance as purchase price adjusted for the increase or decrease in market value, plus distributions received in our holding period,” he says.“We aim at an average annual return of 5% on our prime real-estate portfolio and 10% on our value-added/opportunistic portfolio, very much based on a risk and return perspective,” he says.
The performance of the pension fund’s illiquid alternative assets is benchmarked for each asset class based on time-weighted returns against an absolute return target, Grøhn explains. “Fund investments are also assessed on money multiple and IRR,” he says.
Measuring performance of real estate investments on a frequent basis is important, even though development and performance of the private markets are difficult to monitor compared with public investment.
“We have divided our portfolio of around $20bn (€18.5bn) of assets into public and private, with the private investments being a bit more long-term than the public.
“We need to steer these investments so that we are able to hit the rate our pensioners need, so what we do is very much about the timing required by our pensioners,” he says.
“In the private markets, we need to time our investments the way the market allows us to — for example, when prices are going down, we need to have a lot of firepower to buy.
“That’s difficult when you don’t have a public market to compare prices to, so you have to use intelligence from existing deals to find out how much people, and banks, are willing to pay.
“If we make opportunistic investments – participating in development, for example – there is a considerable risk, so we need to price our returns at a very high level,” Grøhn says. “We look at returns in terms of the cash received, and on top of that, we consider write ups and write downs as affecting valuations,” he says. “That is what we see as our performance.”
• Measures cash flow from rental income on a continuous basis
• Pensions insurance company uses KTI indices
Finnish pensions insurance company Ilmarinen measures cash flow from rental income on a continuous basis, according to Esko Torsti, head of unlisted investments.
“In addition, we have an external appraisal for each asset in our real estate portfolio annually, and changes in valuations are added to cash flow income to form a view on total income,” he says.
Ilmarinen does benchmark its real estate investment performance but it also invests with the goal of absolute returns.
“On the one hand, we have constructed our real estate portfolio to provide a steady cash flow with decent returns,” he says. “Furthermore, we have benchmarks for rental activities with a view on a relevant peer group.”
Ilmarinen uses indices from KTI, an independent information provider in Finland that produces benchmarking, research and analysis for the country’s real estate sector.
The approach Ilmarinen currently takes on the performance measurement of its real estate assets has been largely consistent for the last few years.
Measuring the performance of these investments on a frequent basis is very important. “Our portfolio is designed to be concentrated on core assets,” Torsti says. “We have found that this approach has benefits for the risk characteristics of the total investment portfolio.”
Ilmarinen has been diversifying its real estate investments internationally.
In October, it acquired a 50% stake in Piet Hein Buildings – a central Amsterdam office complex.
The pensions insurer bought assets in Germany last March, acquiring a 50% stake in the 68,000sqm Victoriastadt Lofts office property in Friedrichshain in Berlin, alongside Immobilien Europa Direkt, an open-ended property fund run by Schroders.
Before that, it had invested in an office property in Frankfurt am Main’s Theodor Heuss Allee in a joint venture with Amundi.
• Performance has three aspects — deals, costs, and environmental, social and governance factors
• European real estate benchmarks are not yet representative enough
Dutch pension scheme administrator and asset manager MN uses INREV benchmarks to measure performance for its non-listed real estate.
“Performance has [many] sides to it,” says Jeroen Reijnoudt, senior portfolio manager for non-listed international property at MN. It has to do with the deal side — the revenues by income and capital growth — and it has to do with the costs, but also with ESG factors. We follow a variety of benchmarks and we mainly use them to objectify our achievements and the achievements of our external fund managers,” says Reijnoudt.
“A projected level of financial performance is, of course, an educated promise by external managers, but projected costs are a certainty, and it’s this awareness about the net result that is important for our clients.
“We can make beautiful investment proposals, but in the end our clients want to know if we are really adding value by bringing them the best deal possible,” he says.
MN is not just interested in projected financial performance, but also in the potential social and environmental impact of its investments.
“As a responsible investor we need to pay good attention to the total package and various benchmarks can play an important role in this,” he says.
Although the quality of real estate benchmarks is improving, he says, citing the IPD Pan European Property Fund index and the INREV Core Funds index in Europe for core investors, Rejnouldt says the indices are still not representative enough.
“We notice that the entire fund universe in Europe is still in its early phases,” he says. “However, we try to use property benchmarks (IPD and INREV), cost overviews (INREV), and sustainability benchmarks (GRESB, Global Real estate Sustainability Benchmark), as a proxy for the competitiveness of our performance. These indices are getting better, more sophisticated and more reliable, over time.
“It took the NCREIF 40 years to build its database, and we can’t expect it to be there in Europe overnight, but it’s definitely going in the right direction,” Rejnouldt says.
Marc van Begin
AG Real Estate
• Monitoring lets the investment team follow performance on multiple levels
• Benchmarking is done against other asset classes as well as between property classes
Belgium’s AG Real Estate, the country’s largest real estate group, measures performance of assets quarterly – it defines the expected annual current yield and the total return of each of them through a budgeting and forecasting process, explains the group’s CIO, Marc van Begin.
“Our actual performance is assessed based on these expectations and on the actual current yield and total return – including periodic revaluation – of each asset and portfolio, he says.
“The definition of our KPIs [key performance indicators] is comparable to a framework like EPRA or IPD.”
Van Begin says this monitoring lets the investment team follow its performance from a micro level – ie, at the level of each asset – to a macro level, meaning the portfolio, and ultimately at group level, and compare the risk-adjusted performance of each portfolio.
“On top of these periodic KPIs, the IRR since acquisition, the re-evaluations and results on a comparable basis are also a key KPI for us,” he says.
AG Real Estate benchmarks its performance against other asset classes, rather than investing for absolute returns. This benchmarking is also done between real estate asset classes
Since last year, AG Real Estate has participated in the EPRA benchmark in Belgium and IPD/MSCI for office properties.
“Hence, we are contributing to the transparency of the market, and this was an important driver in the decision to do this,” says van Begin.
Because AG Real Estate works with quarterly forecasts, the group also measures its performance quarterly.
Van Begin notes that depending on an investor’s particular accounting valuation rules, they can find themselves obliged to duplicate performance metrics.
“This is the case for us, as we also report on an amortised cost base under IFRS. This forces us to use a double performance reporting set, with IFRS performance and economic performance,” he says.
Marieke van Kamp
• Continuous monitoring of real estate portfolios seen as very valuable
• NN tries to take account of the entire value chain
NN Group in the Netherlands monitors and measures its real estate portfolio continuously, and meets with all external investment managers responsible for the different parts of the portfolio at least weekly to discuss individual holdings, according to Marieke van Kamp, head of private markets at the group’s investment office.
The group does benchmark real estate assets, but van Kamp stresses this does not mean they are not investing for absolute return. “We invest in real estate to achieve an absolute, steady income,” she says. “For benchmarking purposes, we participate in MSCI/IPD and INREV, annually and quarterly.
“In 2016, we put some effort into reporting our direct holdings and joint venture participations as one fund to INREV, using the guidelines of INREV and we normally report on an IFRS basis.
She says this enables NN to benchmark its whole real estate portfolio using the Investor Vehicles Analysis Tool.
“We feel there is a lot of value in these kinds of initiative and tools because by creating solid market indices the attribution of real estate in mixed portfolios can be much better demonstrated,” van Kamp says.
More than ever, NN’s portfolio is managed on an integrated level across all assets.
“We developed metrics to make different types of investments in the portfolio – bonds, equities, loans, real estate – better comparable, to enhance the insight in their individual added values.
“And we try to take into account the whole value chain – costs and risks of overarching holding structures, costs and risks of non-Euro exposures and, very important for us as an insurer, the solvency capital attracted by investments,” she says.
Regarding how frequently investment performance is measured, van Kamp says quarterly valuations and performance reviews are suitable for NN’s real estate investments, because it is a relatively illiquid asset class.
• Property performance measurement is gradually evolving
• As interest rates have fallen, real estate portfolio structures have changed
Simon Jones, senior investment consultant at Hymans Robertson, sees investors changing their attitude to assessing and monitoring the performance of their property assets.
Jones says: “Performance measurement for real estate investments is evolving, albeit gradually, as investors are increasingly posing the question: what are the purposes for which I am holding real estate?
“Historically, real estate was regarded as the diversifying element of a portfolio, but as the needs of investors have evolved as interest rates have fallen and pension schemes have matured, so has the structure of real estate portfolios. Pension schemes faced with a need for income to meet benefit payments have employed mandates such as secure-income real estate portfolios, which offer exposure to long-term, inflation-linked contractual income streams.”
These have markedly different characteristics to conventional balanced portfolios and within the firm’s growth/income/protection framework, it is not uncommon for investors to have exposure to two different real estate portfolios.
“Where portfolios have different objectives, it is only right that the manner in which performance is measured is appropriate to the portfolio and the broader goals of the investor,” Jones says.
“This may be to either deliver a given level of income, a real return, an absolute return, or simply to deliver returns related to the property market,” he says, adding that all of these can be considered appropriate and have a potential role to play in performance measurement.
“The method and frequency of performance measurement should be considered from a governance perspective at the time of investment. Investors can therefore position themselves to judge whether an investment is achieving what was intended.”
For example, in recent years the firm has advised clients to invest in secondary quality property mandates to capture the attractive distribution yield.
Measurement against a broadly based real estate benchmark, which is not representative of the subset of assets targeted, would have been inappropriate and so expectations for this mandate were framed in terms of income levels and absolute returns.