The revised Performance Measurement module now offers clearer guidance on assumption descriptions while enhancing the depth of performance evaluations. It incorporates a standardized approach for calculating asset-level returns, aligned with the INREV Asset Level Index. These updates apply to reporting cycles concluding on or after 31 December 2022.
The Performance Measurement module exists to assist investment managers in calculating and reporting historical performance metrics for both vehicles and assets. Primarily aimed at direct property vehicles, these guidelines seek to standardize performance reporting for investors.
INREV Indices as Performance Benchmarks
Such standardization also enhances the usefulness of indices like the INREV Indices, which could serve as benchmarks. Comparing vehicle and asset performance can provide insights into the overall performance of the vehicle. Benchmarks should be based on vehicles that share similar investment mandates, objectives, or strategies.
The Performance Measurement module includes concepts that are consistent with the Global Investment Performance Standards (GIPS) issued by the CFA Institute and the NCREIF PREA Reporting Standards. Although the frameworks are different, the intention is to align the approaches and avoid conflicts in the methodologies.
Compliance and Disclosure
Investment managers must assess their adherence to the guidelines’ requirements through periodic self-assessments. The compliance level and an annual effectiveness score must be revealed to investors in the annual report.
Compliance Self-Assessment and Vehicle Styles
Performance measures and the level of disclosures may vary depending on the style of the vehicle. The level of discretion of an investment manager in determining the cash flows of a vehicle and investment restrictions vary significantly depending on the vehicle type. Some performance measures may not be appropriate for certain vehicles.
For example, closed-end vehicle managers decide on capital calls and distributions, while open-end managers must handle new issues and redemptions, which can disrupt the portfolio strategy. Therefore, money-weighted returns are more applicable to closed-end vehicles, whereas time-weighted returns are better for open-end vehicles.
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The module includes several new metrics, and performance measures of a vehicle or an asset should fairly represent the performance of that vehicle or that asset. They should be reliable and consistently computed and presented, to enable investors to understand and compare the performance of the vehicle or the asset.
Disclosure Rules for Measures and Assumptions
Vehicle documentation should list the performance measures disclosed by the investment manager and the frequency of these disclosures to investors. The manager must reveal the calculated performance measures and the methodology used.
Investment managers should disclose any significant assumptions used to compute the performance measures and their components. The use of the INREV NAV is encouraged. When the INREV NAV is not used and adjustments are made to the vehicle NAV, these should be properly disclosed.
Presenting performance at both vehicle and asset levels requires sufficient disclosures. These disclosures are intended to give current and potential investors a clear and full view of the vehicle’s historical performance.
Aligning Calculation Frequency with NAV Valuations
Performance measures of a vehicle should be calculated at the same frequency as the published NAV valuation of the vehicle, with annual being the minimum frequency. It is expected that the investments held by a vehicle are measured at fair value, whatever GAAP is used by the investment manager to determine the NAV of the vehicle.
Periods for which a vehicle does not perform valuations can still be used to provide a data point, as long as an NAV is determined. For instance, a vehicle may provide quarterly NAVs, but only annual property valuations. In interim periods, the NAV would reflect all changes to the balance sheet while holding the value of the property portfolio constant.
Some measures required in the guidelines may be less relevant during the investment/disinvestment period. However, investment managers are still required to provide the measures included in this module. They may provide comments alongside the measures to explain that the figures could be distorted because the vehicle is in its investment/disinvestment phase.
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Vehicle-level performance measures should be computed in the vehicle currency in order to reflect the true performance of the vehicle.
Nevertheless, the group of assets performance measures should be determined using the vehicle currency, either on a currency-neutral basis or taking into account the currency effect. Time-weighted returns (TWR) are the preferred performance measures to use when an investment manager does not have control over the cash flows of the investment.
Updated Methodology and Disclosure Requirements for Vehicle and Asset Performance
The revised module adds clarifications on assumption descriptions and enables a more detailed performance analysis. New guidelines also cover the calculation of gross-of-fee performance returns, allowing managers to assess the impact and complexity of fee models.
Developed in line with European non-listed real-estate practice, the module lists required and recommended performance measures. Managers who disclose recommended measures must follow the associated computation and disclosure rules to claim compliance. Disclosure of recommended metrics remains voluntary, and non-disclosure does not constitute non-compliance. The module advises that performance measurement should reflect the vehicle’s style, type, structure, and strategy, and that asset-level measurement should consider the vehicle’s performance context. For further details, users should consult the Revision and Change Procedure section.
A total vehicle-level return on a time-weighted basis must be disclosed in the annual report for one, three, five, ten-year periods and since inception, presented on an annualised basis. When the return period is longer than one year, the exact number of days may be used for annualisation, including partial-year periods such as one year and two months. All fees charged at any vehicle level are included, with guidance to avoid double-counting distribution fees and to incorporate amortised fee portions. A vehicle-level income return, based on net investment income, must also be disclosed for the same periods.
Net investment income measures operational income on an accrual basis, excluding capital transactions, valuation changes, transaction costs, sale proceeds, taxes on capital gains, and capitalisable replacement costs. Rental income is recognised per accounting standards, and certain expenses linked to unrealised NAV changes, such as incentive management fees, are included as components of unrealised gains or losses. Rental and other income from both direct and indirect investments are treated as the net investment income equivalent of a vehicle’s interest or holding in another vehicle.
