Investors continue to benefit from a growing uptake of INREV guidelines, but is the difficult capital-raising environment proving to be more significant? Shayla Walmsley talks to several investors to find out

Almost 100% of non-listed real estate fund managers polled by INREV earlier this summer said they had embraced (some) INREV reporting standards. But are end-investors seeing the difference?

According to the INREV review of reporting best practice, 98% of fund managers claimed in their 2009 annual reports to have adopted at least half of the reporting guidelines up from 81% in the review of 2008 annual reports and 72% in 2007.
"It's like an election in a Communist country. There is huge acceptance within the European market," says INREV CEO Matthias Thomas.

Critical mass - what Thomas describes as a "common, consistent and transparent approach" to reporting - will be a non-negotiable factor in improving transparency across the segment. But there's only so much the guidelines can do, for two reasons.

First, it's difficult to legislate for difference - and the guidelines cover diverse and multifarious investors and fund managers. Second, the market will out - and it's being driven not by guidelines but by the clout that comes with capital in a capital-constrained market.

One of the biggest challenges for fund managers is that investors are a varied bunch. "Fund managers are getting slightly better, especially on reporting. They're listening to investors about their demands - and investors demand a lot. But Danish investors, German investors and French investors will have different requirements," says Michael Nielsen, managing partner at ATP Real Estate, the indirect real estate subsidiary of the DKR500bn (€67bn) Danish pension fund.

It isn't just that fund managers have improved what they offer, it's that investors have raised their expectations. Volker Wiederrich, CEO of investment advisory firm Swisslake Capital, suggests that investors are far more likely to go into detail with fund managers, and that they're far more focused on due diligence than they were before the crisis. "There have been a lot of changes. There are a lot of topics raised by investors that fund managers have had to accommodate, such as fee structures," he says.

But just as, say, reporting differs between fund manager and fund manager, it would be a mistake to think investors are all pretty much after the same things. They aren't.

"There are always differences between what investors and what fund managers want," says Patrick Kanters, managing director of global real estate at APG, which manages pension fund assets worth €275bn. "But not all investors are like-minded. They might have different investment horizons, for example. That's why we prefer to choose which investors we invest with."



Over the past couple of years, with few fund offerings coming to the market, APG has remained an active investor, though primarily in joint ventures. In these, as Kanters points out, there's an opportunity to set the governance structure and the reporting structure, with most managers open to negotiation on an improved governance and alignment of interest structure.

"Joint ventures are somewhat different [from funds in terms of negotiating terms]. They have a smaller investor base, which gives you more influence over decision-making on strategic issues," he says. "There's more flexibility because you're working as a small group. Not ruling out funds, it's our preferred route because we can also choose our fellow investors."



Second, as Nielsen points out: "Money talks. Larger investors will find it easier to get fund managers to comply."

Guidelines or no guidelines, it's still the case that you're going to get a better deal the more cash you have to bargain with, especially in a market characterised - from fund managers' perspective - by difficulty in raising capital. Will it eventually be the case that fund managers have to adopt the guidelines in order to raise capital? "It's already the case that fund managers have to adopt the guidelines to raise capital," says Thomas. "The world you are describing that we might see in future is already here."

"As a fund manager, you have to deliver if you want capital from investors," agrees Nielsen. "For us, it has always been part of the due diligence process. ‘Are we happy with the reporting?' is one of the questions we would ask during due diligence. Fund managers have to be able to show that they are up to scratch on administration and reporting so they can concentrate on the investment side."

Investors in a stronger position
Arto Tuunanen, real estate funds portfolio manager at Keva, the €28.9bn Finnish local government pension scheme, cites INREV as just one - albeit significant - participant in a broader debate about what investors can expect from fund managers.

"It might have something to do with INREV but it's a long-term trend and investors were already asking for more from fund managers," Tuunanen says.

He continues: "Fundraising is difficult and has been for a while. The balance is a bit more on the investor side. Investors have more say on fund terms, including reporting."

That balance could be shifting sooner rather than later. A recent report from Swisslake counted 142 new private equity property funds targeting $69bn (€48.5bn) - 42% more than in the same period last year. This isn't exactly a complete reversal. It still takes 16-22 months to raise funds now, compared with 10-14 months pre-crisis. Nor will the balance of power between investors and fund managers switch overnight, but this is at least a small shift towards rebalancing between supplicant fund managers and investors selectively dispensing capital largesse.

But what's to say that, when the market changes, fund managers won't revert to old, opaque ways? There is a long-term shift," says Nielsen. "A serious fund manager won't improve the quality of their reporting and then take a step backwards. Many fund managers are looking to INREV guidelines on reporting as a standard framework - and that's a good starting point."

In any case, investors have longer memories than fund managers might think. Thomas says the painful lessons learned by investors after 2008, and the intelligence gathering they did then, will not disappear when the market changes. "If fund managers are using the guidelines now, they won't take a step backwards," he says.

If the market is one factor influencing the negotiation of better terms for investors, existing relationships is another. According to Tuunanen, guidelines are no substitute for relationships. "When you invest in certain funds, you know the people better and it's easier to communicate and to provide information and to keep up the discussion," he says.

"When you enter a new financial relationship, you have to do some work on the fund manager. There's no substitute for personal contact and relationships are very important. These have to be there, not just the reporting. It's quite a lot of work but you can't do without it."

Room for improvement
In the meantime, there's still work to be done on the guidelines themselves. Despite ubiquitous adoption of some, even reporting standardisation is a way off yet. "Different fund managers have different reporting processes," says Tuunanen. "It's hard to compare and find the same information in different funds' reports. If they were more similar, it would be easier to find data. That's one suggestion."

Nielsen agrees such a move would be "useful". "We have between 30 and 40 different reports every quarter and I'd like to be able to find the same information in the same place," he says.

In the meantime, says Kanters, work needs doing on the frequency of reporting, as well as on its uniformity. Those improvements will be good for both investors and fund managers." Like the others, he'd like to see a standardised approach on reports — but "they've been transformed in recent years. We're getting there", he says.

In the meantime, INREV NAV is the next big issue. Nielsen says fund managers are still some distance from calculating net asset value in the same way - that is, according to the INREV guidelines.

"We've adopted INREV's definition of NAV because this adjusted NAV is a better expression of true economic value," says Kanters, pointing out that all the fund managers APG has required to adopt INREV NAV have been willing to do so.

Christiaan Ticheler, real estate portfolio manager at the €2.7bn Stork pension fund, is enthusiastic about the INREV guidelines - indeed about the whole enterprise of pressing fund managers to better serve their clients - but he points out that, even with INREV NAV, it's still difficult to get at the underlying value because of divergent accounting practices across Europe.

"You don't know what you're dealing with. You don't know that you're comparing like with like," he says.

What Ticheler would like to see is a pan-European valuation standard based on the UK model. "Valuations are the only thing we have the market pricing. The Anglo-Saxon tradition is a lot more responsive to market evidence," he says. "That isn't necessarily the case on the continent, where there are also differences between markets."

Meanwhile, at INREV, is there room for improvement? Undoubtedly, says Thomas, pointing to a need for greater transparency in total expense ratio (TER) disclosure. Not only valuations but also fee metrics remain problematic. Only 16% of the funds in the review disclosed a TER or other fee metrics-related items, which was the same level seen in the review of 2008 reports.

Yet it's debatable whether investors should push for a standard per se at all on issues other than reporting. Does it make sense to dispense with what might be described as negotiating arbitrage - the kind favoured by APG, for instance - and opt instead for industry-wide standards?

Again, you come up against diversity. "Every fund is different. Each has a different strategy and structure," says Kanters. "There is no standard governance or alignment of interest structure and, in any case, that's not what INREV strives for. These are guidelines: it's not an attempt to standardise."

There's plenty of room for compromise. The adoption of guidelines, rather than ‘rules', based on their own reporting hardly smack of the heavy hand of regulation crashing down on recalcitrant fund managers. You could even see as a limitation the fact that the information on adoption of the guidelines comes from fund managers themselves. "What would be the benefit of a fund manager giving a wrong answer?" says Thomas. "There is no gain to fund managers to overstate their acceptance of the guidelines. Distortion would be detrimental to the fund manager. If they're not adapting, then they're losing out to their competitors."

It is just as well these are guidelines rather than commandments, given investor concerns over some of the terms, including the classification of funds as core, value-added or opportunity. Research director Lonneke Löwik in May acknowledged that the approach "had proven not to work". Now investors are contributing to a reclassification process.

Global adoption
In the meantime, the guidelines are getting broader as well as deeper. According to Thomas, the guidelines are having a significant impact outside of the European market. They're being translated into Chinese and other Asian languages. ANREV, INREV's sister organisation in Asia, has launched a guide to the guidelines.

The US is still to be conquered, primarily because, although there are a lot of industry associations, there is no comparable organisation to INREV. Although INREV members are using the guidelines in the US, says Thomas, "for once that market has the largest potential for increased improvement". He adds: "The demand is being driven, as always, by investors seeking global standards."

What INREV aims to do, of course, is to create a perfect market by getting fund managers to provide as near as possible to perfect information. But asymmetrical information - and imperfect markets - equally work to investors' advantage.

Divergent valuation systems, for instance, disguise volatility that is there but which investors can't see. "The industry itself embraces the way it works now," says Ticheler. "Although they won't say so, some pension funds and institutional investors would rather it remains as it is. Why? That's almost a philosophical question. If you can't see volatility, is it there?"

He adds: "It's beneficial to some investors if the market shows less volatility than there is. As an investor, you need to know how it works to profit from it. Volatility adds to the possibilities I find in the market. But in terms of our long-term liabilities, we want coverage that is as non-volatile as possible. There are two sides to this story."