There's room for more than one equity real estate index.
The NCREIF Property index, the industry standard for more than 30 years, is no longer the only game in town. Investors have a lot more choices today and new indexes are popping up all the time.
- Investment Property Databank, a London-based global real estate research firm, has big plans to add a vintage-year performance index and is in the midst of creating an index with the Pension Real Estate Association that measures performance of open-end funds in core, value-added and opportunistic strategies;
- The National Council of Real Estate Investment Fiduciaries is working with the European Association for Investors in Non-Listed Real Estate Vehicles, or INREV, and its Asian counterpart, ANREV, to launch a global fund index designed to be a global benchmark. They expect to present preliminary results of the new index at the ANREV Annual Conference in October and the NCREIF Fall Conference in November.
- In September, the National Association of Real Estate Investment Trusts and FTSE Group plan to publicly unveil their joint real estate index, which derives the value of the underlying properties from REIT stock prices; and
- Earlier this year, ratings firm Moody's Investors Service and real estate research firm Real Capital Analytics began sponsoring a transaction-based set of indexes, Moody's/RCA Commercial Property Price Indices.
Also, the NCREIF, creator of the Property index, developed its first fund index, the NCREIF Fund Index-Open-End Diversified Core Equity, in 2005. Now it is beginning to take hold as a benchmark, replacing NCREIF's standard benchmark. Investors that have adopted the new NCREIF index include the $237.5 billion California Public Employees' Retirement System and the $12 billion Ohio Police and Fire Pension Fund.
The board of the Ohio Police & Fire fund made the switch because members felt the index was more reflective of the investible universe, said Dave Graham, communications manager, in an e-mailed response to questions. When it made the switch in November, the board noted the pension fund's peers had been shifting steadily away from the NCREIF Property index toward the Open-End Diversified Core Equity index.
“There's been a significantly increased need from investors to know what the (real estate) market is doing,” said Claude Angeloz, partner and co-head of the Partners Group's real estate investment business.
Two years ago, Partners Group and Thomson Reuters unveiled a closed-end real estate fund index, Partners Group Thomson Reuters Private Real Estate Index.
Zug, Switzerland-based Partners Group does not earn any money on the index, Mr. Angeloz said. The firm began collecting market data a decade ago in order to measure how its non-core real estate portfolio was doing on an absolute and relative basis.
“It's a coincidence that the index is coming out at a time when the market is changing a lot,” he said. “Investors want to know how their returns are relative to the market. They are no longer willing to take track record numbers from the private placement memorandum and assess them on an absolute-return basis. They are looking for a suitable reference on how their investments have been doing.”
Chicago-based NCREIF has been working continuously to expand its index offerings, but the “NCREIF Property Index remains the gold standard,”said Jeffrey R. Havsy, director of research at NCREIF.
However, consultants said the NCREIF Property index, the granddaddy of institutional real estate indexes, does not exactly mirror modern institutional real estate investor portfolios because returns are reported only on an unlevered basis. The NCREIF Property Index is used to compare performance of properties, but the Open-End Diversified Core Equity index does that while including such elements as leverage and cash held by the funds. The core equity index reports the results of 30 core open-end commingled funds.
Non-core investors will have the NCREIF Townsend Fund index, a joint index series with real estate investment consultant The Townsend Group, that includes both open- and closed-end funds and core, value-added and opportunistic strategies. Although it was launched in 2008, Mr. Hevsy said it is not used as a benchmark yet because fund managers are not turning their numbers in on time. NCREIF and Townsend Group are working with managers that submit data to ensure their numbers are submitted in a timely fashion so the returns can be frozen at the end of each quarter, he said.
Consultants say investors have been picking and choosing their benchmarks based on the nature of their real estate portfolios, including how much leverage they have.
“Benchmarks are recommended based on the client's individual programs which … may vary significantly. We do not advise one benchmark as being superior to another,” said Anthony Frammartino, Cleveland-based partner with Townsend Group. “The NPI is most appropriate for investors with direct real estate holdings and who are not using leverage. This would be a minority of investors today.”
Mr. Frammartino said what attracts investors to NCREIF's diversified core equity index in part is its inclusion of leverage — which most institutional investors use in some form in their portfolios. It also includes managers' fees, allowing for before and after comparisons, he said.
The diversified core equity index has “more consistently applied and generally accepted practices for valuations,” especially for core strategies, he said.
Avery Robinson, vice president in the real assets consulting group at San Francisco-based consulting firm Callan Associates, says he “definitely seeing a trend away from the NCREIF Property index.”
“During the financial crisis, a lot of investors who were benchmarked against the NCREIF Property index saw the variances between the investments in their underlying portfolio and the way the index is set up. The differences really came to light during the crisis,” he said.
“Investors are exploring other options,” he said.
In addition to the aforementioned NCREIF indexes, it also offers the NCREIF Transaction Based index. Not intended to be a benchmark, Mr. Hevsy said, it samples the real estate investment universe as a complement to the NCREIF Property index.
“Depending on market conditions only certain property types might be selling,” he explained.
Investment Property Databank's approach is to target what drives the performance, not just measure the investment return, said Jim Valente, director, performance and risk analytics, for IPD North America, Chicago. He attributes the proliferation of indexes to the “maturation of the industry.”
Recession spurs interest
Investors' experiences with the recent recession have spurred interest in new indexes, Mr. Valente said. Investors were upset over real estate performance over the last five years. “Part of it was their fault because they didn't understand the risks they were taking,” he said. “The other part is what they thought they were buying is not what they bought. They never had a chance of beating the benchmark.”
Right now, investors do not know where their portfolio index is coming from, Mr. Valente said. For example, investors know how leverage contributed or detracted from their own real estate portfolio but they don't know how leverage contributed to their benchmark return, he said.
IPD is planning to release other indexes, including one for real estate separate accounts, Mr. Valente said.
Washington-based real estate trade group NAREIT and FTSE Group's daily real estate index will offer property level returns by tracking the value of equity REITs, explained Ted Stover, managing director-research & analytics in FTSE Group's New York office.
The new index derives the property level returns from the daily pricing of REITs. It's based on a system of deleveraging the REIT balance sheets to reveal the amount of debt and equity on the balance sheet of each REIT in the index, Mr. Stover said.
Still, many investors are sticking to the tried and true NCREIF Property index when it comes to benchmarking their private real estate portfolios.
The $9.6 billion New Mexico Educational Retirement Board, Santa Fe, uses it for its private real estate portfolio. (The board uses the Wilshire REIT index as its benchmark for its REIT portfolio.)
“We chose that index because it is widely used and recognized for private real estate,” said Bob. Jacksha, the pension fund's CIO.