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Washington DC Compliance Roundtable Seminar Real Estate Indices & Benchmarks for Performance Presentation - NCREIF Fall Conference November 8th, 2012

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Washington DC Compliance Roundtable Seminar Real Estate Indices & Benchmarks for Performance Presentation - NCREIF Fall Conference November 8th, 2012 Powered By Docstoc
					                 This document was presented during the 2012 NCREIF Fall Conference.
                 The author(s) take full responsibility for all content.
                 This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




Washington DC Compliance Roundtable Seminar
Real Estate Indices & Benchmarks for Performance Presentation
April 15, 2010




                                                                                       NCREIF Fall Conference

                                                                                       November 8th, 2012




                                                                                       Charlie Stout, CAIA, CIPM
                                                                                            i    i
                                                                                       Managing Director - ACA Beacon




                                                                            Nothing herein should be construed as legal advice or as a legal opinion
                                                                            for any particular situation. Information is provided for general guidance
                                                                            and should not be substituted for formal legal advice from an
                                                                            experienced securities attorney.
       This document was presented during the 2012 NCREIF Fall Conference.
       The author(s) take full responsibility for all content.
       This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                                                     Outline
1.    Defining Benchmark and Index
2.    Index as a Benchmark
      Index as a Benchmark
3.    NPI vs. ODCE comparison
4.    True Real Estate Benchmark?
5.    Case Study 1
      Case Study 1
6.    Townsend index considerations
7.    Case Study 2
8.    TBI index considerations
      TBI index considerations
9.    Alternatives for benchmarking
10.   List of common Indices




                                                                                                                                            2
      This document was presented during the 2012 NCREIF Fall Conference.
      The author(s) take full responsibility for all content.
      This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




               Defining an Benchmark
o “A benchmark is a collection of securities or risk factors and associated 
  weightings that represents the persistent and prominent investment
  weightings that represents the persistent and prominent investment 
  characteristics of an asset category or manager’s investment process.” ‐ CIPM

o “An independent rate of return (or hurdle rate) forming an objective test of 
   h ff i i l                 i    f i                     Ab h        k h ld
  the effective implementation of an investment strategy.  A benchmark should 
  be a focal point in the relationship between the manager and the fiduciary 
  body overseeing the prudent management of the assets.” – AIMR‐PPS 
  Performance Attribution Subcommittee

o “A point of reference against which the COMPOSITE’S performance and/or 
  risk is compared” ‐ GIPS




                                                                                                                                           3
       This document was presented during the 2012 NCREIF Fall Conference.
       The author(s) take full responsibility for all content.
       This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                Defining an Benchmark

Criteria ‐ (AIMR Performance Attribution Subcommittee)
1. Representative of the asset class or mandate 

2. *Investible (e.g. a viable investment alternative) 

3. Constructed in a disciplined and objective manner 

4. Formulated from publicly available information 

5. Acceptable by the manager as the neutral position
5 A       bl b h                 h        l    ii

6. Consistent with underlying investor status (e.g. regarding tax, time horizon etc.) 




                                                                                                                                            4
      This document was presented during the 2012 NCREIF Fall Conference.
      The author(s) take full responsibility for all content.
      This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




               Defining an Benchmark

o A benchmark may take any of these forms: 

        1. A well recognized published index

        2. Customized blend  of indexes

        3. A “peer group "of similar funds or portfolios 

o 1 and 3 are most popular choices, and may be equivalent for some indices

o NCREIF website: “The NFI‐ODCE is one such sub‐index, and is considered a 
  benchmark as all the included funds follow a similar strategy and the universe 
  is investable.”




                                                                                                                                           5
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                           Defining an Index
o “Method of measuring the value of a section of the market. It is a tool used by 
  investors and financial managers to describe the market, and to compare the 
  investors and financial managers to describe the market, and to compare the
  return on specific investments.” (provide source)

o Not intended to be a benchmark

o Purpose or intent:
    o Used to describe the market – “representativeness”

    o Broader asset class research purposes

o Examples: 
    o     NFI‐OE (NCREIF Fund Index – Open‐End Equity)
          NFI‐OE (NCREIF Fund Index  Open‐End Equity)

    o     Equal –Weighted NFI‐ODCE (akin to R3K)




                                                                                                                                         6
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                           Defining an Index
o A passive Index reflects no active management

o Geltner & Ling provide 3 reasons why this is not possible for real estate
    1. Need for Operational Improvement

                 High active management of properties and costs over longer time periods
               • Hi h ti              t f        ti     d    t       l      ti      i d

    2. Need for specialized local expertise due to lack of informational efficiency

                 Can t click a button to know if 00 Main Street price is over / under valued
               • Can’t click a button to know if 100 Main Street “price” is over / under valued

    3. Impossible to replicate passive index due to trading whole assets, unique

               • Not investable – can’t hold the entire property universe due to trading illiquid 
                 entire properties

o Appears passive index isn’t possible for real estate?


                                                                                                                                         7
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                    Index as Benchmark

  Index often used as a strategy or composite benchmark
o I d    ft      d       t t              it b h      k

o Measuring a managers’ success in achieving what they were hired to do

  Alternative use of investor s money would have performed over a similar time 
o Alternative use of investor’s money would have performed over a similar time
  period facing similar risks

o NPI, ODCE, and Townsend are indices used as benchmarks
    o Is that correct? 




                                                                                                                                         8
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                      NCREIF Index - NPI
o NCREIF Property Index (NPI)
   o      Market Value is over $300 bln w/ 7,200 properties as of 6/30/12
          Market Value is over $300 bln w/ 7,200 properties as of 6/30/12

   o      Large property pool of commercial real estate property level returns

   o      Unleveraged, investment‐grade, non‐agricultural, income‐producing properties

   o      Acquired on behalf of tax‐exempt institutional investors (majority pensions funds)

   o      Primarily Core –

            o      excluded properties in re‐development stage and with less than 60% occupancies
                   excluded properties in re development stage and with less than 60% occupancies

            o      Includes wholly‐owned, joint ventures

   o      Appraisal Based (follow strict accounting and valuation standards)

   o      Quarterly time series total rate of return

   o      TWR, gross of fees



                                                                                                                                         9
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                 NCREIF Index - ODCE

o NFI‐ODCE  (NCREIF Open End Diversified Core Equity)
    o     Smaller population – about 30 U.S. open‐end funds (1/2 are non‐active)

            o      Data back to 1978, includes funds that no longer exist and thus avoids survivorship bias.

    o     Created in May 2005, NCREIF published the first in a series of Fund Indices. 

    o     Mostly Core, but includes land and properties w/ lower occupancy and in development stage

    o                                         (              )
          Calculated on Investment/Fund Level (Modified Dietz)

    o     Quarterly data, Valuations done quarterly and every 12 months externally 

    o     Cap‐weighted and gross of fees, w/ net available




                                                                                                                                         10
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                                  NFI ODCE
                          NPI vs. NFI-ODCE
o “NCREIF Fund Index provides the better measure compared to the NCREIF 
  Property Index, even though it is a peer group comparison rather than a(n) 
  Property Index even though it is a peer group comparison rather than a(n)
  (unleveraged) market opportunity measure. In other words: real estate needs 
  a different type of “index.” (Larsen, Brunette – Russell Research)

  Does ODCE provides better benchmark than NPI?
o D    ODCE     id b        b h     k h NPI?
    o ODCE as a “peer group” reflects investment experience more accurately…

      Yet, not as representative of a market proxy  NPI better fit
    o Yet not as representative of a market proxy – NPI better fit

    o ODCE includes some non‐Core properties, which can amplify return variation during 
      volatile times

o Neither is perfect, but recommend ODCE




                                                                                                                                         11
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                  Benchmark?
True Real Estate “Benchmark?”
o As defined today, short answer is “no”

o Nearly impossible for real estate to be “investable”

o Can’t hold the entire property universe due to trading illiquid whole properties

o Need to find another term, technically

o Does ODCE provides better benchmark than NPI?
      “Peer group” as opposed to a market proxy
    o “Peer group” as opposed to a market proxy




                                                                                                                                         12
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                                     Case Study #1
Question

  Real Estate Manager X has been presenting composite performance of the U.S. 
o Real Estate Manager X has been presenting composite performance of the U S
  Core Real Estate and is researching a best fit benchmark.  The composite 
  includes a combination of commingled open end funds and separate accounts.  
  Manager X recognizes differences between ODCE and NPI, but commonly gets 
  compared to the NPI and as a result, elects to use NPI as the benchmark.  How 
  should manager approach this scenario?




                                                                                                                                         13
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                                     Case Study #1
Answer

  If Manager X cannot find a suitable index and thus chooses NPI, firm should 
o If Manager X cannot find a suitable index and thus chooses NPI firm should
  consider disclosing the calculation differences. 

o The benchmark returns are calculated using a different methodology from the 
  composite. The benchmark returns assume no leverage for the properties 
  composite The benchmark returns assume no leverage for the properties
  included. Benchmark returns weight cash inflows mid‐period and cash outflows 
  monthly, while composite returns weight cash flows daily. Composite level 
  returns, calculated using the same methodology as the benchmark, are 
  available upon request. 




                                                                                                                                         14
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




NPI Limitations as a benchmark

o Not investable 

o Un‐leveraged 

o Data at property level only ‐ excludes capital structure

o Cap expenditures and property sales are assumed to occur mid‐quarter (1/2 
  weighting), whereas income distributions occur equally at each month end 
  (1/3 weighting) over a quarter.

o May not be optimal portfolio mix for manager strategy




                                                                                                                                         15
     This document was presented during the 2012 NCREIF Fall Conference.
     The author(s) take full responsibility for all content.
     This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




         NCREIF Index - Townsend
NCREIF Townsend Fund Return 
o   Created in 2007, released in May 2008

o   NCREIF and Townsend Group produced data on additional fund types

o            y y                  yp
    Indices by style and vehicle type:

     o     Core, value added, and opportunistic strategies in both open and closed‐ended structures

o   TWR , gross and net available

o   Vintage year reports – IRR (money‐weighted) and multiples

o   Funds included when first capital contribution takes place and removed when final real estate 
    disposition occurs

     o     Partial periods are excluded from the index (talk about this in the context of Amstar situation)




                                                                                                                                          16
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                                    Case Study #2

Question

o Real Estate Manager Y manages value‐add and opportunistic strategies in 
  closed‐end fund vehicles.  The 2010 Vintage Year U.S. Opportunistic composite 
  contains a single closed‐end fund.   Manager Y does not wish to present 
  performance relative to a TWR calculated index and disclose away the 
  difference.  What are the firm’s options?




                                                                                                                                         17
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                                    Case Study #2

Answer

o Due to very limited number of 2010 Opportunistic closed end funds that 
  incepted during the year and submitted data to NCREIF, there is not a Vintage 
  Year benchmark for that strategy.

o Options may include…




                                                                                                                                         18
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                      NCREIF Index - TBI
o Launched in February 2006 and created in conjunction w/ MIT
o Property transaction data from NCREIF Property Index (NPI) sold during that quarter

o Uses hedonic modeling – regresses transaction price against appraised value using 
  coefficient variable.

o Designed to remove “smoothing” and of appraisal based returns ‐ be comparable to 
  stock and bond indices

  Appraisal based indices tends to be more appropriate for benchmarking
o Appraisal‐based indices tends to be more appropriate for benchmarking
    1. In institutional portfolio, appraisals (annually required under GIPS today) occur more 
    frequently than transactions (holding period may be about 5 years)

    2. Appraisal data represents a larger sample and thus less “noisy” or less random error




                                                                                                                                         19
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




            Benchmark Alternatives
o CPI + 400 basis points 

o T‐bills + 600 bps 

o Absolute return benchmarks are not uncommon, but must assess pros and 
  cons related to the overall strategy
                                    gy

o Non real estate differences can exist in inflation, interest rates, cap flows, and 
  other macro economic factors

o Don’t inform investor about the underlying investment opportunity set, or 
  provide performance relative to portfolio set.

o CPI and Treasury do not fit the criteria




                                                                                                                                         20
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




            Benchmark Alternatives
o Custom benchmarks are most discussed alternative
    o Subset of the underlying funds in the ODCE grouped by investment style

o NPI + risk premium
      Fair, but the trade‐off is estimated risk and return
    o F i b t th t d ff i          ti t d i k d t

o NFI‐ODCE + 150 bps

  Stylized NPI
o Stylized NPI
    o i.e. ‐ Equal allocation of 25% across 4 key sectors

      y                  g          g
o *Key is there is not right or wrong benchmark selection– find a best fit and 
  disclose effectively




                                                                                                                                         21
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




             List of Common Indices

*(non‐exhaustive list of common indices used by private real estate managers)

o NPI

o NFI‐ODCE

o NFI‐OE

o NFI – Townsend (NTFI)

o NCREIF Transaction Based Index (TBI)

o NCREIF Timberland

o NCREIF Farmland




                                                                                                                                         22
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




             List of Common Indices

*(non‐exhaustive list of common indices used by private real estate managers)

o OECF Index (Townsend)

o IPD (Great Britain) – Peer Universe
    o    Offers over 100 indices across 24 global markets

o PCA (Australia) – Peer Universe

o ROZ (Netherlands) – Peer Universe




                                                                                                                                         23
    This document was presented during the 2012 NCREIF Fall Conference.
    The author(s) take full responsibility for all content.
    This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




                    Forthcoming Indices

• New U.S. Property Index – IPD, PREA
    –    Expected release is February 2013

    –    Ultimate goal to create new Global Index

    –    Open end funds for Core real estate

• New Global Index – NCREIF, ANREV, INREV
    –    NCREIF (U.S.), ANREV (Asia) INREV (Europe)
         NCREIF (U S ) ANREV (Asia) INREV (Europe)

    –    Both Closed and Open End funds




                                                                                                                                         24
        This document was presented during the 2012 NCREIF Fall Conference.
        The author(s) take full responsibility for all content.
        This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.




     Further
     Q
     Questions?
Charlie Stout ‐ cstout@acacompliancegroup.com




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Description: Washington DC Compliance Roundtable Seminar Real Estate Indices & Benchmarks for Performance Presentation - NCREIF Fall Conference November 8th, 2012.