Goodfor people who like graphs: A new index is coming. Data firm Investment Property Databank and the Pension Real Estate Association are partnering to create the PREA|IPD U.S. Property Fund Index.
The new index will track the investment returns on commercial real estate generated by open-ended comingled commercial real estate funds. That means real estate investors will be able to compare their returns to the yields won by institutional investors like pension funds and insurance funds.
But isn’t this new index similar the Open-End Diversified Core index run by the National Council of Real Estate Investment Fiduciaries? Jim Valente, director of performance & risk analytics for IPD North America, is glad you asked. “Ours will include a much broader or complete range of funds, including a number of value-added or non-diversified funds,” he says.
Subscribers to the PREA|IPD index will also be able receive information on how the funds in the index are structured, including leverage, fund costs and ownership structure. The idea is to give investors clear idea of not only what yields are available on the market, but how those yields are being generated. “The Index will link fund performance to real performance and everything in between,” says Valente. Thewill show “the impact of active management through the direct link between a fund’s performance and the performance of the underlying real estate.”
“PREA members will have access to a significant amount of information underlying the headline index numbers,” says Gail Haynes, president of PREA. That includes “significant aspects of fund structure that are driving returns, and how performance varies across location and property type.”
The additional transparency will help provide stability to the market. “Real estate investment funds have historically lacked transparency compared to other asset classes,” says Greg MacKinnon, director of research for PREA. That lack of transparency has had a significant impact on the fate of the funds—particularly in the run-up to the financial crisis. “In 2006, 2007 … even in 2005, investors thought they had transparency. But what they were investing in was not what they thought they were investing in,” says Valente.
This new transparency will also benefit real estate as a global asset class. The information gathered by the PREA|IPD U.S. Property Index will allow for the addition of the U.S. market to global fund benchmarks, says Valente.
“IPD is confident that the PREA|IPD U.S. Property Fund Index will be a major addition to the IPD Global Property Fund Index, and that this will result in benefits to all PREA members,” says Simon Fairchild, managing director for North America for IPD. The new Index will join seven other property fund indices that IPD currently offers: U.K., France, Germany, Italy, Nordics, Pan-Europe and Australia.
The new Index is also a good fit with PREA’s missions of “sponsoring objective forums for education, research and industry communication,” says Haynes.
The first full results from the Index should be released early next year covering the fourth quarter of 2012. The Index will also include historical data on the funds it covers, probably going back to 2000, notes MacKinnon.