The case for acting together

For what is still a relatively small market, real estate has no shortage of organisations dedicated to it. Two of the most high-profile, the European Public Real Estate Association (EPRA) and the European Association for Investors in Non-listed Real Estate Vehicles (INREV), demonstrate the industry's diversity and the challenges of servicing pension fund investors.

The mushrooming of associations has come with the increase in pension funds' cross-border investment - combined with a pressing recognition that European real estate markets are far from uniformly transparent. The greater the cross-border investment, it follows, the greater pension funds' interest in membership of associations that lobby for increased transparency.

That pension funds have organised at all is an achievement, according to Raymond Satumalaij, real estate fund manager at the Blue Sky Group, the pension fund adviser. "If you look back to a decade ago, these associations didn't exist," he says. "It's been a boost for the industry as such, which is why we've supported them from the beginning.

"You can see that the membership now is spread throughout European countries. It fulfils a need for organisation for pension funds in a segment that hasn't historically been organised."

Yet beyond helping them to invest in what they understand, are real estate associations doing enough to ‘organise'- and more significantly to appeal to pension funds as well as (or as opposed to) real estate companies and other institutional investors?

Building a consensus is necessary but far from unproblematic - either across member categories or among institutional investors. It is not clear, for instance, that more experienced investors in real estate will require the same services as those new to it, let alone that institutional investors and other (for instance corporate) industry players will have the same interests. The problem for real estate associations, in short, is that it is tricky to identify common interests among different types of investor.

"Associations have to build a consensus, which isn't always easy," says Satumalaij. "Basically, you have two groups of investors: those who are committed to real estate as an asset class and those who are new to real estate as an asset class. Associations need to make new investors aware of what they're getting into - to provide transparency for these investors."

To date, INREV has handled the ambiguities by focusing on specific projects. There is something to be said for finding the lowest common denominator.

INREV research manager Ville Raitio claims pension funds make up the organisation's "most important member group". It has 200 members from 20 markets; 50 of them are institutional investors.

Yet he believes that the difficulty of building consensus among pension funds and other industry players has been overstated. In INREV's case, this applies equally across markets - despite variations in regulatory restrictions.

"There are no differences. Our members have the same needs, despite variations in restrictions in specific markets," he says.

The difference between INREV and EPRA is one of remit: not just in content but in breadth. Putatively representing the real estate industry may give you leverage in terms of ability to lobby on a number of issues at one time - given the availability of sufficient resources, of course - but representing a smaller number of investors in a specific type of vehicle wins hands-down for focus.

"In a sense, the fact that our focus is quite strict helps a lot," says Raitio. "It helps us build consensus among different types of investor. But it also needs to be flexible. We need to take into account, for instance, the special case of institutional investors who face more restrictions."

‘Taking account' can mean simply hedging. Take INREV's recently released investment definitions - itself no small task when you consider that even a term such as ‘yield' can have different meanings in different markets (net of operating costs in the UK, gross or net in the rest of Europe). Where INREV has been unable to find consensus on some definitions, the investors' glossary identifies the definitions with notes on the discussions.

This is an issue of design, of course, rather than function. "The definitions are useful for everyone - whether fund manager or investor, those used to the industry or new investors," says Raitio.

Potentially more challenging differences could emerge for INREV with its planned standardisation of the questionnaire investors present to fund managers during the manager selection process. Currently, they are asking the same questions but in different formats. With the new tool, German investors will still need a special module to address additional market-specific regulatory issues.

More significantly, Raitio acknowledges that fund managers and pension funds see the whole issue differently. "Interestingly, fund managers see the different market rules as a big restriction - but investors don't," he says. "That's because fund managers see investors coming from different locations but they're not in a position to see the detail. Investors see it daily and they know better how it is."

The fund manager questionnaire, designed for larger investors, can also be used for new investors coming into the market. "We've gone some way towards standardisation," he says.

Next up is a means of standardising the measurement of fund manager performance. For INREV, as for real estate associations more generally, standards is the most important issue. Yet the real paucity of information is glaring, and efforts to increase transparency are still, relatively, in their infancy.

"We need to work more on professional standards," says Raitio. "The problem is that there is no central data warehouse. With equities, you can just look up the share price. You can't do that with [unlisted] real estate.

"The pressure for a benchmark is coming from investors. The INREV index [measuring fund managers' performance] will bring reporting to a more detailed level. Investors want to know what the fund's performance is, how they invest, what the risk factors are. It will make the market more transparent."

 

The appeal of association membership, according to Michael Nielsen, CEO of Ejendomme, Danish pension fund ATP's real estate subsidiary, is investor empowerment. ATP is a member of INREV.

"It's up to investors to ask fund managers to adhere to the [INREV] definitions," he says. "Standards that would make reporting more standardised are on the INREV agenda - more transparent for investors and fund managers. It's a reliable benchmark for the industry. When will it happen? Good question. I can't answer it."

Nielsen says the number of pension fund members is "proof that there's a demand for a benchmark. If we can with other asset classes, we need a benchmark for real estate."

Critical mass will help. INREV claims that 100% of institutional investors plan to increase their allocations to non-listed real estate over the next year, and that access to expert management is "the key driver behind investors' enthusiasm" for unlisted funds (just in front of diversification and enhanced returns). Yet demand has been tempered by funds' lack of transparency and inadequate market information, as well as by high management costs.

Yet even though slicing projects up may help with the deliverables, it is not inconceivable - at least to a sceptic - that at least some fund managers will resist a tool that gives investors visibility on their (lack of) performance.

What investors want - from fund managers and from associations - is bang for their buck. Hence the potentially problematic divergence in the dual roles of advocacy and service-provision. Some the criticisms of EPRA have centred not only on its corporate-heavy membership (and bias towards industry players, rather than investors) but also over the alleged failure to get the best for its members in charges over last year's switch from Euronext for calculating its specialist real estate index.

INREV's narrower remit gives it an advantage over EPRA, which since its inception has served diverse investors in a fragmented market.

"When we set up in 1999, the European market was fragmented and to some extent it still is," says EPRA research director Fraser Hughes. "Investors had different attitudes. Although Dutch investors were already invested in listed real estate, not many UK pension funds were - for them, it was either bricks and mortar or unlisted real estate funds.

"The trend has changed. Now, real estate investment is more international. Five years ago, the majority were investing domestically or regionally; now, the majority are investing outside their home market in the broader global market."

He points to EPRA's pan-European advocacy for REITs legislation to allow the formation of REITs - legislation that will, he claims, increase the number of new products, market transparency and a standard set of guidelines.

"There's a place for a whole host of different real estate products and, compared with five years ago, now there are more options. The more tools investors have, the better - both for first-time investors in real estate and those already invested in bricks and mortar, listed or unlisted property," says Hughes.

The difficulty in terms of measuring effectiveness is the difficulty all advocacy faces: proving your effectiveness to the investors who fund you. In a sense, EPRA's achievements have been more nebulous than those of, say, INREV. It has been national legislatures - not EPRA - that introduced REITs legislation, after all.

 

ould a focus on more, and more definite, products help? It depends on the products. Raitio might argue that INREV is acting - for example, in the area of investor education - only for investors in non-listed vehicles. But even if other associations launch their own investor information products, for their own sub-sectors, there will still likely be considerable overlap. It may be that inadequate information transforms into surplus information and leave investors no nearer a single, credible source for all things real estate.

Faced with too many choices, two things could happen in the real estate market. The first is the emergence of a standard deemed more credible than the others - which will effectively mean duplicating organisations will have been wasting their time developing less credible ones. The second is that pension funds give up on the idea of ‘certifying' investor education altogether, which means all organisations will have been wasting their time. The process - of agreement or attrition - will likely be long.

Will the availability of increased vehicles benefit pension funds? Yes. But it is not about pension funds - at least not exclusively - and Hughes does not pretend that EPRA will attract a mass membership of institutional investors in the short term.

"As time goes by, more UK pension funds will join. We expect one or two Swedish pension funds, too. We'd like to see at least the top 20 pension funds with an active interest in real estate joining over the short to medium term.

"We like to think we encourage our members to become actively involved," he says, but of 190 current members only a handful are pension funds.

Even for more defined organisations such as INREV, the case needs to be made to investors that they will get sufficient services to justify both the cost and effort of membership.

"Among pension funds - yes, absolutely, there's demand, but also for more transparency across the industry. What I hope is that investors will consider joining," says Nielsen. "We have more than 50 investors already. But investors still have to learn about what they get. It will take time to get it known."

Satumalaij argues that it is up to pension funds themselves to set the agenda - and up to associations to push for the right aims in a fast-growing sector. The problem is that, apart from staff, the work as well as the will to change is constrained by members' capacity. For this reason - if not because once you've got members to work, you have to get them to agree to a common purpose - associations are unlikely to develop as rapidly as the market.

"Is there no hope for rapid change? It isn't that negative," says Satumalaij. The pace is just a fact of life. It won't move that fast."