A culture of secrecy and fear of a loss of face are among the challenges IPD faces in rolling out its product in Asia. But progress is being made - a good example is South Korea, as Kevin Swaddle reports
For the benefit of readers who do not know us, IPD is the company that produces the performance indices used in most of the world's major property investment markets. Over the last quarter century, we have established databanks covering all the most important European economies, plus South Africa, Australia, New Zealand, Canada and the US. Six years ago we took our first steps into Asia, with the creation of a databank in Japan, and this year we published our second annual index in South Korea. This article describes some of the practicalities and challenges of creating new property indices in Asia.
The indices that IPD publishes show the total return on directly owned property investments (the income received by the owner as rent and changes in the capital value of the properties), and should not be confused with the stock and REIT indices that are also published in many markets. Generally, they are much more difficult and time-consuming to produce than indices based on share prices.
IPD indices increase transparency: they provide a basis for comparing property with other classes of asset, comparing the performance of different types of property or geographic areas, and providing investors and managers with a benchmark against which to compare their own portfolios' returns. Lately, they have also been used as the basis for pricing instruments in the rapidly emerging market for real estate derivatives, including Japan.
With the exception of Japan, which was an early leap of faith for us, IPD's current work in Asia is largely a response to the investment strategies being pursued by our clients. The world's largest investment institutions are working hard to achieve global diversification and Asia is the region where most are keenest to gain exposure. Where the investor treads, the performance measurer will not be far behind.
The approach we have taken has two distinct strands. We are working with international and regional investors on a pan-Asia basis to measure the performance of their properties wherever in Asia they happen to be located. This has given us a core of properties throughout the region, and, as samples grow towards critical mass, we will consider breaking out individual national indices.
At the same time, we are working in individual markets like Hong Kong and Singapore to establish groups of investors who are willing to work with us to create an index. A feasibility study has been proposed in Singapore and we are working hard to establish enough support to press ahead with this.
One of the great strengths of the IPD model is that all our data is sourced directly from the owners of the assets. They provide us with details of their income, their expenditure and the valuation of their properties. We aggregate their data with those of the other portfolios in a market to produce the index and the benchmark. But there is little we can do in a market without the active cooperation of the property owners, and one of the most difficult things in each new market is to win the confidence of enough property owners to form a credible initial group. We can encourage and we can educate, but we can't force the pace. If a market does not want an index or is not ready for an index, there is not much we can do except wait.
Breaking the cycle of chicken and egg is a feature of each new index. Portfolio A will not join until they know that portfolios B and C have already committed. Portfolio B wants to know that portfolios A and C are on board before they will commit. And so on.
In Asia, there are some specific obstacles. One is overcoming the culture of secrecy that is to be found in several countries. The IPD model is based on an absolute guarantee of the confidentiality of the data supplied by the owners of the assets. All outputs are aggregated in a way that ensures that data on an individual property or fund can never be identified. But it can take a while for everyone to become comfortable with the idea that our whole business is based on a relationship of trust.
In some parts of Asia, there is actually a cultural objection to the idea of adverse comparison. The manager does not want to lose face. This can be difficult when you are offering a benchmark that 50% of managers will always underperform.
A more tangible obstacle is valuation. IPD returns are based on appraised values, so our indices require (a) that the assets in the portfolios we measure are appraised on a regular basis, and (b) that the valuations are sufficiently consistent and robust.
In many parts of Asia regular valuation of assets is not the norm. Many owners are content to hold their properties at book cost or to conduct infrequent or sample valuation to give them a feel for the way values are moving. Long-term core funds are the ones mostly likely to have a good valuation regime in place, and these are slowly becoming more common.
The valuations need to be of a reasonable standard, and the quality of valuations can vary tremendously in Asia. The minimum we need is an explicit appraisal standard, which is consistent across portfolios to be measured. This can come from outside a market, where international appraisers are being employed, but in the long run it is more robust if a good local standard has been adopted, and there is a recognised valuation profession in existence.
South Korea is a good example of the way an index matures over time, and also provides a model for the way other indices are likely to become established in the region.
IPD started talking with investors in Korea during 2004, a feasibility study was conducted in 2006, and the first Korean index was published in April 2007 as a consultative release. This had just six contributing funds and 70 individual assets. This year, the number of contributors was up by 50% and the value of assets in the databank was up by 71%.
The index still did not have the status of a full IPD index, but it captured the imagination of the market. It was launched at a big event in Seoul, in the presence of the leading figures of Korea's property investment community, including the leading non-participants, and already the office component of the index is being talked about as a basis for derivatives.
Kevin Swaddle is director of IPD Asia-Pacific