INREV tears up definitions of private equity real estate funds

INREV is overhauling its definitions of core, value-added and opportunity funds after finding that measuring internal rates of return as well as leverage is not the best way to classify them.

The European Association for Investors in Non-Listed Real Estate Vehicles (INREV) is tearing up its 2004 investment style definitions for core, value-added and opportunity funds because of changing market conditions, it was revealed today.

The definitions had been made to look short term rather than enduring because of falling prices, it admitted.

Up until now, the association has used leverage and IRRs as the key definers of style, but it was the reliance on IRRs that had proved problematic with returns set to fall because of declining values.

In a statement, the association said the level of gearing and IRRs were seen as the best measures available at the time to define style. “But changing market conditions have exposed IRR as a less than enduring factor for any classification,” it added.

After speaking to experts from London’s CASS Business School, INREV published a White Paper today setting out the new definitions. INREV members – who between them control €400 billion ($628 billion) of assets – have five weeks to respond.

The paper proposes defining core vehicles as lowly-geared funds investing predominantly in mature sectors and countries, which also have no or very low development exposure and generate a high proportion of return through income. They will also be well diversified through large holdings of assets and, or countries.

In contrast, value-added funds are funds which may invest in any country or property type and deliver returns from a balance of income return and capital appreciation, according to INREV’s proposals. The fund may allocate investments to less mature markets or alternative sectors, development or other forms of active management, such as active leasing risk, and moderate leverage. Returns will come through adding value to the property via active asset management such as a re-letting, re-positioning and redevelopment.

Lastly, opportunity funds will typically use high leverage, and will have a high exposure to development or other forms of active asset management, and will deliver returns primarily in the form of capital appreciation. The fund may invest in any markets or sectors, and may be highly focused on individual markets or property types.

INREV said it was not imposing the definitions upon members, but proposed to use them while it analyzed data to see how risk factors related to current fund styles as outlined by managers in INREV’s database of vehicles. In total, INREV has come up with a total of six quantitative risk factors which it said should be considered as the key determinants of style. They include: leverage, development, income and distribution as a percentage of total return, country exposure, sector exposure and diversification.
The association said after a period of around two years, it should have a more robust and enduring set definitions of core, value-added and opportunistic funds.