FEATURE: A yardstick for all

With the support and patience of its growing membership, ANREV plans to further blast away the opacity of Asia’s markets by introducing a non-listed real estate fund performance index. PERE Asia Supplement, December 2010/January 2011 issue

Most Asia real estate practitioners know that if you take the lift to the 35th floor of Hong Kong’s iconic Jardine House office tower, you’ll find the Asia headquarters of UK investment and fund management firm Grosvenor. What they might not know is that working from the same building is the industry association, the Asian Association for Investors in non-listed real estate vehicles (ANREV).

While Grosvenor navigates through Asia’s relatively opaque investment markets searching for the best deals, its lodger is occupied with bringing market transparency – currently lacking in the region – to enable firms like Grosvenor to go about their work more efficiently.

The first step is building a significant database. At the start of November, ANREV hosted its annual conference, during which it revealed to its 150 delegates that it had amassed information on 89 funds, representing a combined gross asset value of $65.2 billion. It believes, somewhat conservatively, that the gross asset value of the fund universe in Asia reflects $263 billion of real estate, so there’s clearly some way to go.

In December 2009, PERE spoke with ANREV’s research director Clara Lee, who said at the time that the association had attracted just 50 members. With 92 members today, ANREV has nearly doubled its membership count in less than a year. At the same time, further market penetration is needed.

That brings us to the next step – the introduction of a fully functioning and well-respected performance index. It was on this topic precisely that PERE scaled the 35 floors of Jardine House to speak with Lee and Andrea Carpenter, the former acting chief executive officer of ANREV’s European affiliate INREV, who was on a three-month secondment.

Asia’s turn
 “We have the technology from our affiliation from INREV to be able to follow the necessary information,” Lee says. “We also have the benefit that theirs is already working. In this way, members already can see what the index brings to both investors and managers alike. For us, the next step is convincing them to use it.”

INREV’s index, which was incorporated in 2005, today offers quarterly performance on approximately 253 funds, equal to about 80 percent of Europe’s core and value-added fund market. This is largely thanks to a 320-strong membership, all singing from the same hymn book.

Lee says now it’s Asia’s turn. In the first quarter of next year, she and her colleagues will form a working group comprising up to five GPs and LPs – “some already have expressed interest in being part of this,” she says – to form an understanding of what structure the index will take and set some realistic targets for implementation.

Admitting there are many unknowns ahead, the launch of the index is not likely to happen until after next year. But Carpenter assures: “I think we’ll have made progress on it by the summer 2011.” An index able to produce quarterly information is probably “two to three years” away, she adds.

Undeniable, however, is the support for such an instrument. “There are a number of obstacles in the way, but one thing is sure and that’s the appetite for one,” Carpenter says. “At the investor advisory board meeting at our conference, it probably was mentioned 10 times by 10 different people.”

Indeed, the desire is there if PERE’s conversations in the market are anything to go by. Rong Ren, chief executive officer of Harvest Capital Partners says: “We need to get on with it ASAP. We need to deal with the matter because the lack of transparency in the market is crippling. We need more transparency and, subject to my LPs’ approval, I’m willing to support such initiatives.”

ING Real Estate Investment Management’s chief executive officer for Asia, Richard Price, adds: “It’s very difficult to invest if you don’t know the basic facts about the market. We need to be able to demonstrate these with some validity.” The mission is a tall order, he admits, but the association needs to start somewhere.

Price believes that ANREV’s institutional real estate universe currently is smaller than INREV’s, but Lee and colleagues must attract a decent proportion if the index is to be a success. “To the extent fund managers don’t participate and contribute data, it would have a disproportionate impact on the validity of the data it is able to produce,” he adds.

AXA Real Estate’s global head for Asia, Frank Khoo, also backs the introduction of an index, although he points out: “It could give us indicators, but a lot of things we do are very specific. Looking at performances from second-tier cities in China, for example, I’m not sure will help us.”

The matter of structuring an index for non-listed real estate funds in Asia is one Lee and Carpenter admit will be very tricky. Unlike Europe, where many markets have comparable characteristics, Asia’s markets are incredibly diverse, something that is likely to make the validity of one all-singing, all-dancing index tough. “You could have 50 funds,” Carpenter admits. “But if those are broken down across the different countries, you might find just three or four funds per country and that’s not meaningful.”

In addition, while INREV delivers performance data for core and value-added vehicles, ANREV should start with indices for core and value-added as well as opportunity funds. Carpenter says Europe has more of the former, but in Asia “there are almost similar amounts of core funds as there are opportunity funds, so we’d need to introduce both at once.”

Carpenter is convinced that, once the first firms commit to providing their data, there should be a snowballing effect. Admitting the first converts are likely to be the international firms that make up a significant proportion of ANREV’s membership (see membership breakdown chart, at right), she says domestic firms in countries like Japan and Korea eventually should follow suit.
In addition to INREV’s work, Lee believes the introduction of the database, which provides members access to firm and fund characteristics such as size, strategy and number of investors, will help attract knocks on ANREV’s door as well as vice versa.

Apples for apples
Another significant obstacle to overcome for ANREV, Lee and Carpenter agree, will come when collating the data received. With such diversity of markets, company methods for calculating areas such as net asset value (NAV) can differ widely. As such, ANREV must ensure it provides concise reporting methodology for members to work from, the details of which no doubt will be determined by the soon-to-be-mobilised working group. Both agree much depends on the validity of apples-for-apples comparisons.

This is a challenge, Carpenter admits, that INREV still faces. She says the INREV index currently is viewed by its members as a “useful tool” but not yet something firms are setting benchmarks by. “We are planning to freeze the index next year, which will mean the data always stays the same and there are no changes later on,” she says. One issue for INREV has been member firms updating their data, which subsequently changes historical figures and skews the information from what it was.

“You’d hope that all fund managers would report to INREV’s NAV [guidelines], which would give them a good consistency to the underlying data,” Carpenter says. “That isn’t happening at the moment. The calculations and methods they use must have the same adjustments. It’s fine to calculate your NAV in other ways, as a fund’s investors are going to be taught how to understand its methods. But if they want to compare several funds, then having the same methodology enables like-for-like information. For ANREV, they must focus on the standardisation of reporting straight away.”

Carpenter continues: “Once that’s done, we’ll see a take up in terms of fund managers being prepared to be judged by the INREV index or its sub-indices. They might even set performance fees and hurdles to it.”

It barely needs stating that, if INREV is at this stage five years down the line, then ANREV has some way to go. “In the first few years, everyone just needs to support this project as something that is needed,” Lee says. “It will really become useful after two to three years, when there’s the critical mass and we can say here’s a fantastic sample versus the universe.”

On the 35th floor of Jardine House, ANREV is planting the seeds for an instrument that will undoubtedly prove useful for LPs and GPs alike. What they need is member support and perhaps, more important but harder to attain, patience.

But as the saying goes, good things come to those who wait.