The European ODCE index has been maturing as well as growing. Christopher Walker speaks to Iryna Pylypchuk
“Such a high level of uniformity and transparency of fees and costs for this segment is reassuring”
Iryna Pylypchuk
The Europen ODCE index, run by real estate association INREV, reached a gross asset value (GAV) of €44.7bn at the end of 2022, with 16 constituents.
Iryna Pylypchuk, director of research and market information at INREV, says this is a testament to the attractiveness of the vehicles to smaller and medium-sized investors. They are attracted by the benefits of sector and geographical diversification and a risk-averse strategy, which would require considerable costs and resources to replicate.
This is confirmed by the latest INREV ODCE Management and Fees Terms study, which explores the fee and cost structures of European non-listed real estate funds, with a focus on Total Global Expense Ratios (TGERs). For 2021, the average TGER for the ODCE funds stood at 0.97% on GAV and 1.32% on net asset value (NAV). Pylypchuk notes “this is notably lower than TGER characteristics of an average multi-country/multi-sector fund, which stood at 1.5% on GAV and 2.89% on NAV.”
Another strong indicator of the segment’s maturity is that there is little dispersion in TGERs among the European ODCE funds. “Such a high level of uniformity and transparency of fees and costs for this segment is reassuring,” says Pylypchuk.
“Many milestones were achieved in 2022,” says Pylypchuk. Having ended its consultation phase with the release of the Q1 2022 results, the ODCE index moved to a consistent INREV NAV performance calculation method and expanded its outputs to include accrual-based returns. Two new funds entered the index in 2022, boosting its composition to 16 funds from 15 different managers.
Pylypchuk has “sought to further enhance the governance” of the index. The index inclusion criteria were revised and strengthened for existing funds and new joiners in 2022, with a particular focus on diversification criteria and asset-level data provision. She says the latter “is particularly important”.
This tightening up was made in recognition of the lessons learned from the NCREIF’s US ODCE index. In the US there has been the development of a core-plus market, with higher levels of gearing applied, which triggered a stricter view on the target gearing when considering inclusion into NCREIF’s ODCE Index.
Pylypchuk says: “We have not seen anything like that take hold in the European market. European ODCE funds saw very little change in terms of use of gearing over the life of the index, with average gearing of 24.5% at the end of Q4 2022. However, we recognise the evolving nature of the European market, and this was one of the reasons why geographic and sector diversification criteria were tightened further before the end of INREV ODCE index consultation.”
To be included in the index, a fund now needs to be genuinely diversified. A minimum 75% of a fund’s aggregate gross market value must be invested in at least three of the four main property types of office, industrial, retail and residential. A fund also needs to be pan-European, with at least two of the three main geographic exposures – UK, Germany and France – in the overall real estate portfolio, but no more than 60% can be allocated to one geography.
Pylypchuk says: “While the intention is to continue to monitor the ODCE segment as this continues to develop further, we feel that we are now in a position to further expand the ODCE index’s financial metrics and extend transparency with asset-to-fund level attribution and reconciliation analysis. This is a very important step, as almost all of the ODCE funds have now provided us with their detailed asset information (and all new joiners to the index are obliged to provide asset-level data), and we are now in the early stages in this pilot project.”
She believes the asset-to-fund level attribution and reconciliation analysis will play a significant role for investors. “It represents the next step in transparency for the ODCE Index that can eventually be replicated across the wider European non-listed real estate market.”
Pylypchuk reveals that the new index criteria were also tightened “to ensure as much alignment as possible” across the ANREV, INREV and NCREIF ODCE indices.
All three are moving “towards a common goal” of launching a Global ODCE index next year.
