The UK unlisted funds industry is a global leader in terms of transparency, according to Rachel McIsaac, the energetic CEO of its representative body, AREF. Appointed to the post four years ago, McIsaac has driven progress with a bustle of activity and initiatives and has grown the organisation from 29 to 67 members, who today represent £35bn (€44bn) NAV. If they know what is good for them they will submit their data on time, as she explains to Martin Hurst
The credit crunch might be the main talking point for the real estate industry but the situation is "less of an issue" for UK pooled property funds (PPFs), which form the bulk of the membership, according to Rachel McIsaac, CEO of the Association of Real Estate Funds (AREF). "Most of the balanced funds have no borrowing," she explains.
McIsaac agrees that the broader property industry faces considerable challenges, and stresses that the banks have played their part. "The Bank of England provided liquidity earlier this year which helped to stabilise the banking sector but arguably did little to help the property sector, with banks now lending at over 200bps above Libor."
She adds: "Lending standards were relaxed in the years leading up to the credit crunch. This happens in every bull run - this is an issue which we must address."
Transaction volumes are down sharply but McIsaac says that "to talk about a flat market is simply wrong. For example, the life companies are always going to be in the market because they have to keep reinvesting their money. Furthermore, some investor clients have withdrawn redemption notices on UK funds because today continental Europe no longer looks so attractive."
The downturn has brought the issue of fund redemptions to the fore as investors seek to adjust their exposure to the asset class. Secondary market trading plays a critical role here when funds have not reached their term but the system as it stands is deficient. Currently, managers keep a book of redemption notices and if they find a buyer they will match up the units. In addition to this a newsletter with a list of the redemption notices is published weekly. "This worked during the bull market but now that there is less client demand, a more efficient secdondary trading platform is needed," McIsaac says.
AREF, established more than 20 years ago (and formerly known as APUT), has 67 member funds representing over £35bn of NAV and includes pooled property vehicles promoted by all of the UK's leading fund managers. The association acts as spokesperson for the UK unlisted real estate funds industry on tax and regulatory matters and works towards a conformity and ease of comparison across member funds via the AREF Code of Practice and the AREF/HSBC sponsored IPD UK Pooled Property Fund Indices.Valuation is often seen as a critical element of property investment and is a key area of focus for AREF; indeed McIsaac sees it as "one of the biggest challenges facing the industry".
She notes: "The unlisted market has no exchange traded mechanism to determine the price of units; it is down to the independent valuers to determine the market value of the property and to the fund managers to calculate the NAV price of the unit."
Earlier this year, AREF set up a multidisciplinary committee headed by Jenny Buck, head of multi-management at Schroders, to examine best practice in this area with representatives from the accounting, valuation (Michael Brodtman, head of valuation at CBRE) and pension fund consulting professions as well as multi-managers. "We will be issuing guidance on fund pricing to our members and a new area of minimum compliance to the AREF Code of Practice which will ensure managers are more transparent to investors about pricing policies, redemption procedures and NAV calculations."
A matter that is very much to the fore of the manager-client relationship is the need for greater transparency in the area of fees. "As it stands there is no single standard for the calculation of total expense ratios (TERs). McIsaac explains: "In partnership with other industry bodies AREF has established a framework for calculating TERs and is running a workshop to test run the formulae and show how they can be adopted for individual funds."
McIsaac stresses that in the dissemination of best practice, focus on implementation is crucial. "There is no point publishing huge lengthy guidelines and then leaving fund managers to guess how they should be implemented," she says. "I also believe that guidelines should be written by investors and fund managers; they should not be written by lawyers, consultants and accountants. You really need to be at the hard risk-taking end of the business to know what industry best practice guidance on redemption policies really means to you and the operation of your fund. I so strongly believe that short, practical guidelines are the right thing to do."
The AREF code is a case in point. The first draft was an 80-page document covering the 11 minimum compliance areas. "Nobody would have followed it," McIsaac says. "I rewrote it in 20 pages and the key points are set out on a single page of A4."
The code was launched last year and attention to implementation has been rigorous. "We ran workshops to teach members how to comply," she explains. "Recently we started an audit of all our members on compliance at a rate of five members per quarter; we should be able to cover the main managers within 12 months and all the fund members within the next four years. Membership of AREF is by fund not manager, differentiating it from many other trade associations. This is because investors can only buy units in funds rather than the managers so accountability needs to be at fund level."
AREF's members are bound by a voluntary Code of Practice. The Code's aims are to achieve transparency, promote consistency and comparability between funds; monitor the way in which real estate pooled funds are structured and are accountable to investors; introduce standards of best practice concerning the content and format of periodic statements and other promotional documentation; and introduce minimum disclosure requirements for all funds.
The way in which managers communicate with their investor clients is central to much of the work industry bodies are carrying out. Another key area of focus at the moment is the grouping of funds into risk categories - core, value-add and opportunistic. McIsaac questions the logic: "I don't see how you can get away with labelling funds in the UK marketing regulatory environment that we operate in," she says. "Each investor needs to make their own judgements as to what the risk factors are, taking into account their individual risk/return requirements. For example gearing is a big issue and we think it is important to say exactly what the gearing is. We show it as an absolute number.
"Furthermore, some of the riskiest funds are those that are poorly managed," she adds. "It is as much the manager's vision that will drive the fund into being a top performer as any sort of measure of risk or box that a fund has fallen into. That's what people buy - they think opportunistic is high return."But if investors think that, aren't they being very naïve? "You are encouraging naivety by labelling these funds," McIsaac asserts. "Investors should research manager expertise and track record - negotiating skills among other things. It is a very people-driven business and you can't put people in a box. After all, a lot of opportunistic funds have failed to deliver."
The UK market has set the standard in terms of transparency. "In the UK our figures for performance over one, three, five and 10 years are there in black and white," says McIsaac. "We are so far advanced in the UK with the pooled property fund indices (PPFI) because you don't need to compare funds on a colour-coded scheme; you can actually compare performance on a like-for-like basis.
"The transparency of performance reporting and the integrity of the data mean that the UK property industry is now fully benchmarked and fully performance-measured, making it the global leader in pricing transparency. In much of continental Europe this level of data is not available so they have to rely on other measures; a lot of the discussion taking place there now is where the UK was 10
The AREF-HSBC sponsored PPFI enable users to look at a fund's gearing levels, its yields and its geographical spread. "If you want a balanced UK fund, say, you can clearly see who the top performers are," McIsaac explains. "There is no hiding place - if you are a member of AREF you have to contribute your data. We don't publish until we have received everyone's numbers."
The European Association of Investors in Non-Listed Real Estate Vehicles (INREV), is aiming to produce a benchmarkable index, but obtaining the necessary data input from managers is a challenge. How does AREF see this challenge? "One hour after the data deadline I would go to their offices with the form because they would be holding up the process," McIsaac says. "In general, UK managers are pretty good: they know that the indices have to be done on time, and they realise that it is in their own interests to do so to know the outcome."
In the pursuit of greater transparency the launch of AREF's Investment Quarterly in February 2007 was a major landmark. It has added considerably to the association's workload. "This is a huge exercise," says McIsaac. "To ascertain the capital flows all members have to contribute data which are then aggregated to industry level. There is no disaggregation despite a lot of requests for it."
AREF IQ aims to provide a clear commentary and analysis on capital flows, performance and yield trends of the UK unquoted real estate sector via data gathered from all of the association's member funds. "That is very important data for the industry," says McIsaac. "IQ and the PPF indices are quarterly, which involves a huge amount of data compilation. The PPFI is the global product leader - no other country has managed this, although the others are evolving."
With all this progress, what challenges lie ahead? McIsaac explains that with so much accomplished in the area of data "the interesting thing now is expansion of membership. We represent all funds domiciled and or regulated in the UK, Eire and Channel Islands. About 55% of our ownership is UK and the rest is based in Jersey and Guernsey. An interesting new area for AREF is funds which invest in continental Europe but which are domiciled in the UK. Most have chosen Luxembourg but from the point of view of governance and control they may be better off in London.
Recently AREF moved its secretariat to the Investment Management Association (IMA). McIsaac sees this as an important educational opportunity. "We can move AREF up a level by learning closely from other asset classes - equities and bonds. It is not necessarily a matter of learning only from the property industry," she notes. "In terms of standards and fund structures we don't need to reinvent the wheel."
On the subject of wheel reinvention, it has been suggested by many industry stakeholders that the many different associations could work more closely together. Here McIsaac stresses the importance of selectivity. "Our submissions to the Treasury (UK finance ministry) about fair value in the valuation process were made with the RICS and IMA. Sometimes there is a benefit to being a lot of organisations, each doing its own thing; sometimes there is a benefit of clubbing together and speaking with one big voice. So I think one needs to select the issue and decide on the approach."
McIsaac agrees that the proliferation of industry associations is an issue. "Last year I looked at the different industry associations and considered with whom we might enter into a secretariat-type arrangement," she says. "IMA seemed a natural home: they are 100 times bigger than us in terms of the AUM which they represent. You can really scale up your effort when you have that kind of expertise."
Given all the activity at AREF, is there more the association could do to promote itself to the industry? "There is huge scope to raise the profile of AREF both in the UK and Europe," McIsaac enthuses. "Parliamentary lobbying is not something we have done in past but we are looking into it. This includes lobbying the EU - we were involved in the consultation process on open ended real estate funds - definitely that would be done."