Friday Letter A game of chicken and egg for ANREV

The plan by ANREV to adopt the working guidelines and practices of its older European counterpart, INREV, is laudable and deserves support, but the real work is just beginning. ANREV’s first step: a tricky game of chicken and egg. 

Earlier this week, ANREV, the Asian Association for Investors in Non-Listed Real Estate Vehicles, formerly AREA, announced it is to adopt the working guidelines and practices of its longer established European counterpart INREV as well as form a comprehensive database for its members.

PERE spoke with ANREV after its announcement and learned that within two years, it also wants to launch a fully functioning performance index.

ANREVs strategy is both laudable and deserves support. Programmes such as this are both timely and appropriate.

But now comes the hard work. It was clear from PERE’s conversation with ANREV that the association will need to overcome a, perhaps predictable, game of chicken and egg.

The association is bringing a framework of best practices and governance as well as a database compiling the movements of a non-listed real estate funds sector that has never been forced to, or even asked to, offer details of their vehicles to a shared, forum, even if it is exclusive to its members. At ANREV’s own admission, this will be a challenge, perhaps not in mature(r) markets like Australia, but in the more opaque investment playgrounds on the continent. Some reluctant parties want to see a track record before they participate but unless they participate, ANREV can’t create a track record.

ANREV is currently conducting manager surveys and workshops. It will also be sending out half yearly reports on its progress. Their view, quite rightly, is once the market buys into its obvious benefits, the membership will grow exponentially. But in order for this to happen, a number of leaps of faith need to happen first.

ANREV hopes to emulate INREV’s estimated coverage of 80 percent of the continent’s non-listed investor market. It has some way to go. To give a sober view of the challenge ahead: INREV has 320 members, a data-base of 476 funds equal to a gross asset value of $271 billion, and importantly, a working performance index, albeit not quite as mature as the Investment Property Databank where, in the UK at least, investors even have the confidence to conduct real estate derivative trades on the back of its numbers. ANREV currently has a bit over 25 members, although the database currently has more than 300 funds, although ANREV admits the data is currently a mix of member contributions and public sources, such as media outlets.

In terms of an index, ANREV should introduce this only when it has sufficient membership. Maybe 80 percent market coverage is an excessive target, but 10 percent would be unacceptable. Without naming names, there are organisations out there with indexes that are, frankly, not taken seriously because of their insufficient reach. If ANREV jumps the gun, this could be detrimental to its perception in a market in which it is trying to make a name. The association told us it would review the situation at the end of 2010 and make a decision then, hopefully it will be mindful of just that.

ANREV is taking a necessary major step in achieving its ambitions by adopting INREVs practices and guidelines. We say: go for it, but stay cognisant of the potential traps. If it manages this not-impossible task, in a few years time, we might well be discussing Asia’s first real estate derivative trade. Then we will know the eggs have hatched.

Good luck ANREV.