If real estate is to become a global asset class, it needs to be measurable. Shayla Walmsley looks at the new generation of indices being developed.
The launch of a new index for private real estate funds from Partners Group and Thomson Reuters reflects a maturing market. Investors could be able to see a sudden growth in indices for the asset class. IPD, which will launch the first BRIC benchmark with a Brazil index before the end of 2013, currently has seven in progress.
Yet, until recently, there have been global gaps. Partners Group's joint venture with Thomson Reuters to create a global private real estate index (the PGTR index) is an attempt to plug one of them. The aim of the index is to increase transparency and enable investors to better measure performance of non-listed real estate funds, complementing existing benchmarks from the likes of IPD and NCREIF.
Claude Angeloz, co-head of private real estate, points out that the US historically accounted for the bulk of both activity and fundraising - so it stands to reason that is has also accounted for the indices. That is no longer the case - hence investor demand for a value-added and opportunistic global benchmark.
It is not just Partners Group. INREV plans to cover the whole real estate universe (including with a plan to add to its index focused on core and value-added funds one for opportunistic funds). A research project underway will result in a benchmark that measures non-listed against listed funds. For Europe, it is already possible to measure against the EPRA index. What INREV wants to do is to come up with a global metric.
It is questionable how 'global' a global index can, in fact, be. Despite the attempts of INREV's sister organisation ANREV to create a 65-fund Asian index, it does not include local funds because local fund managers have not signed up.
"Australia is a relatively transparent market, so fund managers saw the advantage of having a global product available," says INREV research director Casper Hesp. "With local fund managers, it's different, but we have institutional investors already active in the region helping to convince them to participate."
In any case, if big benchmarks are going global - global benchmarks are getting more granular. The recently announced Pension Real Estate Association (PREA)/IPD US fund index will eventually be incorporated into the IPD's global benchmark - in short, it will tell investors how the US funds are holding up against their overseas counterparts.
According to IPD director Peter Hobbs, if there has been a shift, it has been towards bespoke benchmarks. "Within more mature markets, people want to understand how segments perform," he says. He cites as examples IPD's decision to separate out logistics from the wider industrial index and its creation of a market- and sector-specific Australian healthcare index.
Investors will use both kinds of benchmark - at a strategic level, a market-specific or global benchmark, but at the investment level, a specific benchmark for, say, London office.
Demand for the second kind tends to come with greater demand for attribution analysis.
"I was with a client in Munich last week, and the diagnostic showed they were buying in the right geography, but that the properties weren't doing as well as the market," says Hobbs. "That's an important message to the CEO - they may have the strategy right, but they need to manage the assets as well as their peers."
There is no reason for proliferation not to continue (at least until it reaches a point of competition and consolidation). Hobbs points out that the markets with the biggest growth in coverage over other couple of years have been Spain and Italy. "One of the most profound long-term implications of the financial crisis will be more transparency in property markets," he says.
If there is no demand for additional benchmarks, it will not be supplied. But it is still important to be clear what benchmarks will and will not do. Angeloz says the PGTR index will do for value-added and opportunistic investors what existing indices do for core investors - show the benefits "beyond anecdotal evidence".
But, according to Hesp, benchmarks will not necessarily change the behaviour of existing investors. The best they can do is to bring new capital into the market from investors currently standing back because there they have insufficient information to invest.