How a new index will help investors make sense of dislocation

As private real estate becomes increasingly global, so too have the tools used to measure performance in the asset class.

Trade organizations the Asian Association for Investors in Non-Listed Real Estate Vehicles (ANREV), its European counterpart INREV and the US-based National Council for Real Estate Investment Fiduciaries (NCREIF) have launched the Global IRR Index. Unveiled late last month, the index tracks the average-since-inception internal rate of return, net of fees and costs, for closed-end vehicles in all three regions on an equal-weight basis. Breaking down average performance by vintage year and strategy, the index allows investors and managers to compare the performance of their funds with vehicles across the industry.

The global IRR Index consists of 294 non-core funds, of which 44 percent are focused on the US, 35 percent on Europe and 21 percent on Asia-Pacific. The vast majority of funds are multi-sector, accounting for 80 percent of the index. Meanwhile, 88 percent of the vehicles are value-add – with NCREIF tracking only vehicles in this risk-return category – while the remainder are classified as opportunistic. Each organization will continue to use the data collection methods they have adopted for their region-specific funds.

Unsurprisingly, the index’s initial findings show significantly better performance among funds launched after the global financial crisis, with Asia-Pacific vehicles posting the largest spreads between their top and bottom quartiles. Vintage 2013 funds achieved an average IRR of 18.39 percent, making it the strongest year on record with top quartile returns of nearly 27 percent. The most recent year on record, 2018, has tallied the lowest average returns post-GFC at 9 percent.

Henri Vuong, INREV’s director of research and market information, said this tool will be especially useful as the industry attempts to make sense of the current market disruption spurred by the covid-19 pandemic. “Everybody is going through the same crisis, but different countries will experience it at different paces,” she said. “The difference is the extent or extremity that will hit each market and how long or short each cycle is. With a global database, firms can learn from each other.”

Everybody is going through the same crisis, but different countries will experience it at different paces … With a global database, firms can learn from each other.
-Henri Vuong, INREV

Dan Dierking, president of NCREIF, said of the index: “For many of our members this is an opportunity for them to understand what’s taking place in other regions.”

Elsewhere, the hope is that establishing global performance measurements will help regional markets stay competitive. “It’s really important for us and for players in APAC to see they can get access to performance data for the region too, measured the same way all around the world,” Amélie Delaunay, director of research and professional standards for ANREV, told PERE. “I often say that it will probably help investors get more confidence in investing in the region if you have a performance index and, as an investor, you’re able to compare that with other regions.”

One such institution is the German investment firm Patrizia. Marko Multas, the firm’s director and head of investments in Asia, said his investment team is constantly seeking insights about the performance of its funds independently as well as in comparison to other offerings. He said the Global IRR index “has greatly enhanced the market transparency and understanding of the industry’s return characteristics.”

Multas also said the collaboration between ANREV, INREV and NCREIF is encouraging. “It has been great to follow the close cooperation between the three organizations to build the Global IRR Index for the investor community by joining forces for the greater good, something that is very important, especially in current times.”

Last week, the three groups established a global alliance memorandum of understanding that formalizes the groups’ joint efforts to pursue cross-regional performance measurements and other products.

“Our members are just much more global than they were in the past. The flow of capital has doubled over the past five years or so,” Delaunay said. “Our members are finding a common agreement here to work together.”

The three organizations have worked together on an ad-hoc basis since 2012. Prior collaborations have resulted in the Global Real Estate Fund Index, which measures the performance of core funds, as well as a joint effort by the three organizations and the Pension Real Estate Association to establish global reporting standards.