New Way to Measure Real Estate Funds
Europe’s nonlisted real-estate funds sector could be about to get a boost.
Last week, the European Association for Investors in Non-listed Real Estate Vehicles (Inrev) introduced a new calculation method for net asset value for Europe’s €400 billion ($563.38 billion) nonlisted real-estate funds sector. The aim: to allow investors to compare the performance and valuations of funds across Europe on a like-for-like basis for the first time. Inrev is a not-for-profit association that has 254 members in 25 countries.
Until now, fund managers have been using their own adjusted NAV and there has been no single definition as to how it should be calculated, which has hindered both market transparency and the comparability of funds, according to Inrev Chief Executive Lisette van Doorn. With capital flows into nonlisted funds rapidly on the rise, the need for standardization has become increasingly acute.
Inrev is proposing that the “fair-value model” — representing the actual market value of a property asset — should be used to calculate NAV, instead of alternatives such as the cost model, says Ms. van Doorn, who is based in Amsterdam. The reason: The fair-value model is a truer reflection of the economic value of a given real-estate investment, she says.
“Many international fund managers have to use different accounting rules in different countries, which makes it very hard for them to compare their own funds across Europe, not to mention other funds. If everyone uses the same model to calculate NAV, it would be much easier for both fund managers and investors to compare funds in different markets,” she says.
Such a model makes sense, says Martin Allen, a real-estate analyst at Morgan Stanley in London. “It’s obvious that something like this needs to be done, to standardize the comparison of funds. Some people may complain that they’ve always done things their way and not want to change. Others might not want their fund’s performance to be easily compared with better performing funds. But, in the end, I would expect everyone to toe the line.”
One investor who welcomes Inrev’s move is Dutch pension fund Stichting Pensioenfonds ABP. One of the biggest pension funds in the world, it has more than €20 billion in real-estate assets under management, around half of which are in unlisted funds.
“The more transparent the market is, the more accessible it is to investors. Standardizing the calculation methodology for NAV will make real estate even more accessible to investors and will grow the nonlisted funds sector,” says Patrick Kanters, managing director of real estate for Europe and Asia Pacific at ABP Investments, the pension fund’s investment arm.
Nico Tates, chief executive of fund manager Aberdeen Property Investors in Europe, says he is “very pleased” with this initiative because it encourages transparency: “We are already using the fair-value model to calculate NAV, but I think we will also see more fund managers embrace this model, partly because their investors will expect them to because it makes it easier to compare different funds,” says Mr. Tates, who is based in Amsterdam.
Aberdeen Property Investors has about €13 billion in real-estate assets under management, of which about €6 billion is in unlisted real-estate funds.
However, the implementation process could take time, says Peter Hobbs, head of research at RREEF, the real estate and infrastructure investment management arm of Deutsche Bank AG. Mr. Hobbs, who is also co-chair of Inrev’s research committee, says that although the nonlisted property funds sector has matured over the past five years, the big issue now is how quickly the standardization of NAV methodology can be implemented.
“The clarity and consistency that this would bring to the market would be very beneficial, especially with regard to reselling assets, because it would be more transparent. However, each European country has its own requirements…It’s a great idea but we need to be realistic about how long a process this could be,” he says.
As part of its standardization drive, Inrev is also suggesting that acquisition costs, such as transfer taxes and accountant fees, should be amortized over five years to create a consistent smoothing of the numbers. Currently, under the fair-value option of IFRS accounting standards — which are widely used across Europe — acquisition costs are capitalized as part of the property and charged to income as fair-value changes in the first year.
According to Aberdeen Property Investors’ Mr. Tates, Inrev’s model makes more sense because, unlike the IFRS methodology, it doesn’t penalize initial investors as far as acquisition costs are concerned.