Inrev, the European association for investors in non-listed real estate, is set to launch a common methodology in September for calculating the adjusted net asset value (NAV) of non-listed real estate funds. Concurrently, it is also introducing standard fee metrics methodology providing fund managers with a format on how to disclose fee structures. The two new tools come hard on the heels of the first standard reporting structure for the industry introduced earlier this year. 'The main advantage of the NAV standard is that it will allow the performance and valuation of funds to be compared,’ explains Berend Scholten, director of professional standards at the Amsterdam-based organisation. 'Up to now, fund managers have been using their own adjusted NAV and there was no one definition on how you should calculate it,' adds Jef Holland, Inrev Reporting Committee member and senior manager for Deloitte in Amsterdam.
Inrev, the European association for investors in non-listed real estate, is set to launch a common methodology in September for calculating the adjusted net asset value (NAV) of non-listed real estate funds. Concurrently, it is also introducing standard fee metrics methodology providing fund managers with a format on how to disclose fee structures. The two new tools come hard on the heels of the first standard reporting structure for the industry introduced earlier this year. 'The main advantage of the NAV standard is that it will allow the performance and valuation of funds to be compared,’ explains Berend Scholten, director of professional standards at the Amsterdam-based organisation. 'Up to now, fund managers have been using their own adjusted NAV and there was no one definition on how you should calculate it,' adds Jef Holland, Inrev Reporting Committee member and senior manager for Deloitte in Amsterdam.
'This hinders market transparency and the comparability of funds. This is the key area to try and give the best reflection of valuation and performance, as there was previously no standard.' One of the key elements of the Inrev NAV is that acquisition costs, such as transfer taxes, lawyers, agents and accountants fees should be amortised over five years, to create a smoothing of valuation and performance in the first five years. Currently, under the fair value option of IFRS, acquisition expenses are capitalised as part of the property and charged to income as fair value changes in the first year. Another big issue is how to account for the deferred tax liability embedded in a fund, particularly given the large capital gains of the last few years in Europe. The Inrev NAV allows for some variation on this point, which Holland describes as one of the most difficult issues that had to be dealt with. 'It was difficult to create one standard as the way in which funds are structured is very specific. But the huge potential variation in how deferred tax is treated should not cause problems, provided managers are clear on how they’ve arrived at the numbers.'
As the model becomes entrenched, new insights will emerge and further refinement will take place, he continues. 'We have set five years as the standard for amortisation of costs, but this may well be extended to 10 years in due course to coincide with the life of the fund.’ The model is a 'living document', adds Scholten. 'Best practices are constantly evolving.' Both Scholten and Holland are confident that the Inrevadjusted NAV will be widely adopted by Inrev's 230-odd members. Holland: 'Many of the large investors and fund managers were closely involved in the consulting process and we’re already seeing interest from fund managers. This will put pressure on other members to adopt the model as well.'
This article appears in the September edition of PropertyEU Magazine.
