Data transparency is yet to catch up with investors’ expectation

The market has seen a gradual increase in the availability of unlisted real estate performance indices since 2018 – several real estate performance indices have been launched, or are being planned, by associations or research organizations. Among them is an IRR index from the European Association for Investments in Non-listed Real Estate Vehicles, launched mid-2018. INREV and sister associations ANREV and NCREIF have a global index in the works, too, expected before year-end. And in August this year, pan-Asia industry association APREA and data provider Preqin also jointly announced the launch of the APREA-Preqin Quarterly Monitor, an index for Asia-Pacific-focused private real estate funds.

“The best way to communicate with decision makers of institutional investors is to discuss investment performance by comparing the performance indexes,” says Shinji Kawano, head of overseas investment at Tokyo-based insurer platform Tokio Marine Asset Management. He has seen growing demand from investors to use these indices to justify their real estate allocation.

Oslo-based Norges Bank Investment Management uses MSCI’s appraisal-based global benchmark for unlisted real estate, MSCI Global Annual Property Index, as its main source of benchmarking. However, the investor explains that benchmarking only serves as an indicative assessment of historical returns, rather than the basis for asset allocation, according to its real estate investments report in 2018.

Matthew McAuley, a senior analyst at real estate brokerage firm JLL’s global research division, tells PERE the growing number of unlisted real estate performance indices is a reflection of the increasingly global nature of cross-border capital flows. In this environment, he says, managers and investors are looking for comparable performance metrics in order to judge closed-end vehicles abroad in the same way they can in their home markets, or for asset-level performance.

Investor interest and capital allocations toward real estate and alternative assets continue to grow, with fundraising volume for private real estate funds increasing from around $80 billion in 2011 to $104 billion in 2018 – albeit an 18 percent drop from $127 billion in 2017, according to PERE data.

However, Bryan Reid, vice-president, global real estate research at global indices provider MSCI, says the varying levels of data transparency between markets is a challenge to data collection for research organizations. Markets with less institutional investing history will be less transparent than more mature markets like North America, Europe and Australia, he notes. Indeed, according to JLL’s 2018 global real estate transparency index, out of the 11 countries categorized as “highly transparent,” Australia and New Zealand were the only countries from Asia-Pacific to make the list.

Huge underlying variety

In addition to the transparency issue, Reid notes that the heterogeneous nature of real estate makes for its own challenge. “Everything and everyone is different. The strategy, the portfolio, to the buildings themselves. There is huge underlying variety,” he says.

Because of this, one Hong Kong- based institutional investor tells PERE that instead of using unlisted real estate performance indices, it uses an internal benchmark made up of different components of returns it tracks against.

“If someone has a Chinese logistics index that tracks the normal return, I will be asking where the asset is, where the sample is. It’s hard to get a direct relevance,” says the investor. He would pay little attention to an index with too limited a sample size.

The lack of comprehensive indices does not prevent investment activity, says Kawano, but he expects Japanese investors, for one, would be more active overseas if more reliable indices were developed. “I know some organizations in the industry are trying hard to brush up existing indices, or launch new indices, but there remain some ways to go,” he says. “We wait for progress patiently.”