After a 22-year run, the NCREIF Property index soon may not be the only game in town.
Institutional real estate investors have used the National Council of Real Estate Investment Fiduciaries Property index as their sole benchmark. But in recent years, as managers and pension funds have begun investing in riskier, non-core properties, many have found the index too limited. Now, Investment Property Databank, an information and real estate data firm in London, is gearing up to provide the U.S. real estate community with a broader range of indexes, as well as performance analysis, which NCREIF doesn't do.
The move is stirring a lot of discussion in the industry, with many managers endorsing the idea, while others take a wait-and-see attitude. Still others want IPD and Chicago-based NCREIF to work together, but have different views about how that would work. NCREIF's board this week will consider a proposal from IPD that the two organizations share information. And Blake Eagle, NCREIF's new chief executive, will meet with officials at real estate advisory firms and pension funds to determine their thoughts on how NCREIF can better serve them and what role, if any, IPD should play.
IPD has a staff of 100 doing data collection, database management and performance analysis for both sponsors and managers, while NCREIF is more of a volunteer organization that represents only money managers, said Bernard Winograd, chief executive officer at Prudential Real Estate Investors, Parsippany, N.J.
"We are a client of IPD in our overseas business, especially in the U.K. We know the firm and their product and have found it very useful. They do a lot of attribution analysis, which tells you why you got the returns you did - if they're due to property type, region selection or what. In real estate, it's hard to get a benchmark that is truly inclusive of the true range of what you can invest in. NCREIF is the closest, but it's not broadly representative of all the investible opportunities. We would welcome a more representative benchmark," he said.
Prefer commercial entity
Mr. Winograd and other managers said the industry would be better served if a commercial entity rather than a trade association owned a benchmark. "Because IPD has greater resources, it's easier for them to make changes than it is for a volunteer organization. They have more of an incentive."
Stacy Gaskins, chief operating officer at NCREIF, said that its executives have held meetings with IPD officials and are exploring the possibility of working together.
"We expect a handful of managers will want to spend a lot of money with IPD to submit a lot more data for attribution analysis services. If seven to 10 managers sign up and supply data, IPD will likely start a business here," Ms. Gaskins said. "They would share data with us so we could produce indices."
IPD would charge each manager with a portfolio of 40 properties or more around $75,000 a year for four reports; companies with fewer than 40 properties would pay $35,000 a year, said Susan Hudson-Wilson, president of Property & Portfolio Research Inc., Boston, an independent real estate consulting firm.
She will have a minority equity ownership stake in IPD and serve as non-executive chairman while she hires a CEO, probably in the first quarter, who would then hire a staff. She will not receive a salary. IPD will operate separately from PPR, and Ms. Hudson-Wilson will not have access to any confidential proprietary data IPD collects. Her role will diminish once IPD is up and running.
"NCREIF includes limited assets in its index. To qualify, properties must be substantially leased. They have to be managed on behalf of tax-exempt investors," Ms. Hudson-Wilson said in an interview. "Many real estate managers have been saying that NCREIF doesn't include a lot of what they're doing. It doesn't include opportunity funds, which don't invest in leased assets. It covers only $80 billion of U.S. property and around 2,600 properties, which is a very narrow definition. In addition, the assets have to be stabilized (almost completely leased). They can't be development or re-development." The index also excludes housing companies and office construction companies, and is light on hotels.
Incentive aspect
The movement for a broader index was ignited when more firms began paying managers on an incentive basis. "If people are judged on their performance, they need to be compared to an index that is truly representative," said Ms. Hudson-Wilson. IPD, which was established 15 years ago, operates in 10 countries, including Ireland, the Netherlands, Sweden, Germany and France. It is in discussions with Canada and Portugal.
"I have been pushing them to come here after working with them in England. I need better data to forecast the U.S. real estate market," she added. Ms. Hudson-Wilson said she has used IPD's U.K. market data for clients for 10 years.
She believes IPD should collect data from institutional investors and give it to NCREIF to incorporate into its index and research. IPD and NCREIF would produce indexes together and share revenues.
Ms. Gaskins noted that NCREIF meanwhile is looking at ways to expand its indexes. "We're close to going to NCREIF 1000, an index that would be more representative for pension funds, and are considering creating a benchmark of U.S. properties that are representative of the investible universe. We're also looking at including taxable properties, which we don't now."
If NCREIF and IPD decide to work together, the two organizations would remain independent of each other, added Ms. Gaskins. "We would have an agreement to share data. We're not interested in supplying attribution analysis, because we don't want to compete with consultants who are members of NCREIF; so we have not explored that business. If managers want the service, they will need to supply the data. Most don't want to get involved in leasing data."
NCREIF can provide a lot of the same services to managers that IPD is talking about, and for a lot less money, Ms. Gaskins said. "We're their employees and can expand to collect information on taxable properties or on opportunity funds. We can take any data and crunch it, if that's what's wanted. IPD would need the same data to construct indices." She said that the membership has been reluctant to provide the data. "Everyone would need to provide it (additional data) to make it worthwhile. Also, many managers don't have the systems in place that would enable them to provide the information."
NCREIF recently added two members to its staff, bringing it to eight, and can add more if need be, Ms. Gaskins said.
One industry executive who preferred not to be quoted said that the issue of NCREIF being an unrepresentative benchmark is hardly new and that the trade group hadn't done anything to solve it until recently. "NCREIF likes things the way they are. It's their little empire. Inviting in a company like IPD is an implicit criticism of NCREIF," the executive said.
Jon Braeutigam, administrator of the $4.2 billion mortgage and real estate division at the $54 billion State of Michigan Department of Treasury Bureau of Investments, Lansing, said NCREIF provides a lot of useful information to the industry, but he believes it would be good to have more real estate managers participating, such as real estate investment trusts and life insurance companies. He is particularly interested in seeing a fund-by-fund breakdown of performance in the way that mutual funds report their results. "We'd like to see a breakdown of the different funds and how they did, for greater transparency." Mr. Braeutigam noted that in the stock and bond markets there are dozens of indexes investors can use to compare performance, while the real estate industry has only one.
"The opportunity funds control a huge amount of capital and should be reporting it. It's important to increase this information - now there is just an aggregate number. We would like to see returns calculated by an independent third party." He added that even though NCREIF could be collecting some of this other data, it hasn't. "Competition can lead to change. In Europe, there are reporting requirements, where property owners must get their assets appraised every year. REITs do not need to get property appraisals. If IPD and NCREIF could team up in some fashion, we would be supportive of that."
