EUROPE - The transaction-linked index (TLI) being developed by IPD, which combines market valuations with traded prices, will be a "gift" when devising asset allocations for pension funds, according to Mercer.

Stephen Ryan, senior investment consultant at Mercer, told online listeners during IP Real Estate's performance measurement webcast on Wednesday that the new index would be of immense value to consultants and their clients because it provides hard evidence about the true volatility of the UK property market.

IPD is pursuing what it terms an "assessed value approach" for its new work-in-progress TLI, a hybrid method combining valuation-based analysis with recent transaction movements in the market.

This method captures more volatility than a traditional valuation-based index.

The transaction-linked series indicates an average standard deviation of 6.1% in the UK market since 2002, while the quarterly valuation-based series shows a volatility measure of 4.5%.

Although institutional investors are unlikely to be reassured by the higher volatility measurement, it is possible the greater certainty TLI brings could help in allocating more capital to the property asset class.

Consultants already use assumptions to adjust for volatility not captured by real estate market indices, and so the greater volatility measured by IPD's TLI is unlikely to change investors' views of the market.

Ryan said: "It may be that when clients are shown the true volatility, they feel a little more uneasy, but the fact is the volatility was always there. This new transaction-linked index simply reveals what it is.

"We now have hard evidence that we can put into the models to show the clients - using realistic data, this is how we propose your portfolio be structured."

Ian Cullen, head of systems and information standards and co-founder of IPD, also told the online audience that the greater certainty over volatility could even see allocations increased because there has always been the potential to overstate volatility through assumptions - to "err on the side of caution".

He said: "With evidence, it may actually demonstrate the assumptions they were using were just too extreme."

Ryan said he was also excited by the new quarterly European index from INREV, which was published for the first time at the end of 2010, calling it a "great step forward for investors".

He said there could be a tendency for investors to focus more closely on the performance of domestic markets over foreign ones and that the quarterly INREV index would help them redress the balance.

Also speaking during the webcast, Matthias Thomas, chief executive at INREV, said the association was striving to improve both individual country coverage and the publication frequency of its index.

"More and more investors now require from fund managers to increase the frequency of valuations, either in the original documentation or in side letters," he said.

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