INREV, the European Association of Investors in Non-Listed Real Estate Vehicles, used the MIPIM conference in Cannes today to introduce a new framework for classifying the style of a real estate investment fund, in what could become a step change for the industry. The association unveiled its 16-page INREV Style Classification guide to a heaving audience, which included many of the GPs and LPs of its 347-strong membership, in a large ballroom at the popular Intercontinental Carlton Hotel.
Central to the new framework was a move away from the traditional approach of determining a fund’s style by target IRRs and target gearing, which was adopted by INREV at inception in 2004, towards a three-pronged metric that evaluates leverage, development exposure and various income indicators.
Madhi Mokrane, head of research and strategy at AEW Europe, who played a key role in INREV’s dedicated sub-committee and who led its presentation today, said: “The most important takeaway from today is that target return is not a determinant of style – it is an outcome. It is the price of risk determined by a manager. This new approach is made from a bundle of risks.”
Makrone explained that following three and a half years of research by INREV, it was determined that funds could work out whether they are core, value-added or opportunistic by measuring against a three-pronged metric that evaluates leverage, development exposure and income indicators instead. INREV was keen to stress that the hybrid ‘core-plus’ style was not to be included in the metric.
Mokrane also said the guide was expected to evolve with the market: “This tool is based on cluster analysis of existing funds, but it will be reviewed periodically as new funds are created.” He noted that it would be used for funds launched from now but not for those launched before its introduction, as that could contravene agreements between fund managers and investors in those funds. Of the older funds to have applied the new criteria already, he said 75 percent remained in the style category they previously held but 25 percent had been forced to reclassify themselves as value-added or opportunistic.
Mokrane said INREV would post an online tool, using the new matrices for managers to input information and determine within which style category their vehicle falls, starting next Monday.
While the new framework was largely welcomed in principle, some delegates questioned the particular figures used to determine the parameters employed by the association. Of specific interest was its description of core funds, which dominate the European marketplace and constituted the lion’s share of the guide’s working fund sample. In the guide, INREV said that only funds with leverage ratios of less than 40 percent could be considered as core, however numerous funds previously considered core held higher loan-to-value ratios, including some funds in Germany that deployed leverage of up to 50 percent.
The majority of the GPs that expressed their opinions on the new guide embraced it. Ian Gleeson, chief investment officer of global multi-manager at CBRE Investors, said: “This guide reflects where the industry has reached. We will certainly be using it.” Matthew Ryall, head of indirect investments at Allianz Real Estate, said: “This is a step in the right direction, although there are other risk factors we must still consider.” Christian Eistrup, managing director at MGPA, said: “We’ll take this into consideration, although it won’t be our primary driver [for determining fund style]”.