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REVIEW OFINVESTOR REPORTING TRENDS ASIA-PACIFIC

2015

FOREWORD

Welcome to the third annual Review of Investor Reporting Trends and best practices published between PwC and ANREV. This report aims to provide fund managers and investors with insights into the trends in investor reporting practices in Asia-Pacific and to enable benchmarking of current reporting practices across different geographic regions and fund strategies. Further to last year’s review, the reappointment of PwC in Europe to conduct the equivalent INREV survey has enabled us to also compare directly with INREV members’ reporting practices.

The 2015 review is the first year where Asia-Pacific managers have had a chance to fully incorporate the requirements of the updated INREV Guidelines, which were issued in final form during April 2014 (http://www.anrev.org/en/page/guidelines). This year’s review therefore builds on the 2014 review, which served in some ways as a “dry run”, giving managers the chance to benchmark themselves against the latest best practices. It has been very pleasing to see the efforts put in by many managers on updating their reporting, and the overall improvements in compliance levels across the region.

During the study, we reviewed the annual, quarterly and ad-hoc investor reporting submitted by 47 non-listed real estate funds, and compared them to self-reviews conducted by the managers using the complance checklist, and the detailed reporting requirements of the INREV Guidelines. The results were then compared and benchmarked to peers within strategies and overall. Private feedback, through interviews and calls, was given to the 28 participating fund managers. In addition to this, discussions were held with relevant stakeholders and service providers active in the region, including several investors, valuers, and sustainability professionals, in seeking their perspectives on reporting advances, difficulties, and where reporting practices should be heading. Please refer to Appendix 1 for details of the framework and approach adopted for this study.

Throughout the publication, with the exception of one case study, the views of interviewees and/or survey respondents are presented as direct quotations, but without attribution.

On behalf of PwC and ANREV, we would like to extend our sincere thanks to all who shared their valuable time and expertise during this project. We trust that all participants received useful feedback from the exercise, which will assist them in adoption of the INREV Guidelines and their ongoing investor relations. We look forward to meeting them again as we conduct the next year’s review.

Paul WaltersAsia-Pacific Real Estate Assurance Leader PricewaterhouseCoopers Limited

Amélie DelaunayDirector, Research and Professional Standards ANREV

REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC 2015

TABLE OF CONTENTS

EXECUTIVE SUMMARY 01

1 THROUGH THE LOOKING GLASS 04

PERSPECTIVES ON THE EVOLUTION IN REPORTING PRACTICES IN ASIA-PACIFIC

2 UNDER THE MICROSCOPE 09

COMPLIANCE WITH THE REPORTING MODULE Of THE 2014 INREV GUIDELINES

3 SNAPSHOT 37

ENVIRONMENTAL, SOCIAL, GOVERNANCE AND INVESTOR REPORTING

4 TAKING THE VIEW IN 41

CONCLUSIONS AND NEXT STEPS

APPENDIX 1 – REVIEW FRAMEWORK AND APPROACH 43

APPENDIX 2 – DETAILED COMPLIANCE RESULTS 48

SPONSORING ORGANISATIONS 49

01

EXECUTIVE SUMMARY

OBJECTIVE OF THE REVIEW

The objective of this review is to provide an update on current market practices in investor reporting within the non-listed real estate fund industry, and in particular to what extent investor reporting complies with the revised INREV Guidelines (the “Guidelines”) issued early last year. The Guidelines, which are based on best practices and investor reporting requirements in Europe, can be a differentiator for fund managers when they are launching new funds. In addition to this, with a view to make them more broadly adopted within the region, we hope that by sharing feedback from Asia-Pacific fund managers, investors, and service providers, we are able to provide valuable input to INREV and ANREV as they continue refining the Guidelines, including their stratification by relevant fund styles (i.e. core, value-added, and opportunity).

DEVELOPMENT OF THE GUIDELINES

CHART 1 — INREV GUIDELINES: THEN, NOW, AND GOING FORWARD

2012: Old INREV Guidelines in effect

Dec 2013: White Paper for New

Guidelines released

April 2014: New INREV Guidelines

launched

July 2015: INREV, ANREV, NCREIF and PREA officially signed an

agreement to create global standards

With the Guidelines coming into effect in April 2014, last year’s review process was treated as an opportunity to raise awareness of the Guidelines, specifically on “Module 2 – Reporting”.

Fund managers have been hugely supportive of being given the chance to discuss the process of implementing these Guidelines in Asia-Pacific markets, in understanding how some of their peers have approached it, and how they have handled any difficulties. Fund managers that participated in both last year’s and this year’s review stated that last year’s feedback played a big part in persuading them to update their reporting for this year’s reporting cycle, by showing gaps in compliance with the new and updated guidelines. This has enabled managers to make an educated decision on whether they wish to update their investor reporting on not only new fund launches, but also existing funds. This has been borne out by the overall or headline compliance levels across the region markedly rising.

02REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC 2015

Going forward, we expect the Guidelines project to increase in scope, as we move towards Global Guidelines. In 2014, INREV, ANREV NCREIF and PREA executed a Memorandum of Understanding to jointly collaborate with a goal to converge reporting standards globally. This development will help investors and fund managers to better understand regional differences and is a notable step towards the development of a set of globally consistent market practices. Global taskforce groups have started work on various aspects of the Guidelines with representation from North American, Asian and European industry players, including feedback gained from interviews conducted as part of this survey. It is worth noting that this is a long-term initiative and that it will take some time to get alignment since each region is used to different investor reporting practices.

FEEDBACK FROM FUND MANAGERS

As set out in Appendix 1, as part of the 2015 review, private feedback, through interviews and calls, was given to the 28 participating fund managers, covering all 47 respondent funds. The importance with which investor reporting, and compliance with the best practices embodied by the INREV Guidelines is viewed by fund managers around the region, was demonstrated by the seniority of management attending these sessions.

Having discussed these revised Guidelines with managers around the region last year, the groundwork for their adoption in the 2014 reporting cycle was laid out, as well as the associated ability to benchmark fund reporting compliance in 2015. With this growing awareness and adoption of the Guidelines, the scope of discussions with fund managers this year has tended to focus on the finer points, such as the depth and content of commentary now required to supplement the existing quantitative disclosures.

During the interviews, we again sought feedback to provide to INREV for the ongoing development of the Guidelines. While in the past feedback from many managers centered on the need to slice and dice Guidelines by investment strategy, this year the themes were more diverse, ranging from the development of sustainability guidelines, to the global alignment of the Standard Data Delivery Sheet (SDDS), as well as greater alignment with US investor reporting requirements. As real estate funds in Asia-Pacific continue to grow, such perspectives as previously menitoned, would provide valuable input when best practices are being refined by applicable INREV and Global working groups, to suit regional and global needs.

For fund managers, having established a reasonable balance within their fund’s core reporting to investors, for many the ‘correspondence’ has turned into a ‘conversation’, and like most conversations it has moved to be more real-time. The key take-away for most fund managers from these conversations is that investor expectations and discussions have branched out from the core financial reporting aspects into areas such as information security and management as well as environmental, social, and governance (ESG) analysis, both of which we will expand upon in this report. To keep up with changing and varied expectations, fund managers need to keep up their conversations with investors, as they strive to meet their needs.

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PERFORMANCE

OVERALL

As anticipated in last year’s report, compliance is growing back towards the levels established with the “old” Guidelines, with overall or headline compliance moving up from 57% last year to 68% this year. As part of this year’s review, in order to reflect the broader range of reporting mediums adopted, we have enhanced the scoring process to incorporate the communication of reporting-related information, such as standing information that is readily accessible to investors via mediums such as web portals. Having adjusted for such factors, the overall compliance rises further still to 72%. We would anticipate that the compliance levels would continue to rise in the coming 2-3 years as reporting is renewed for new funds raised.

ASIA-PACIFIC

TABLE 1 — ANALYSIS BY REGION AND STRUCTURE

Section of Guidelines/Region & StructureAsia-Pacific

Open Closed

Number of funds 18 29

Fund documentation for reporting framework 64% 52%

Content and frequency of reporting 80% 80%

General Vehicle information, Organisation and Governance 80% 58%

Capital structure and vehicle level returns 96% 81%

Manager’s report 90% 85%

Property report 76% 73%

Risk management 82% 63%

Other disclosure requirements1 12% 27%

Overall 72% 65%

For the second consecutive year, the equivalent European INREV Review of Reporting Best Practice survey was conducted by PwC, which allows for a consistent approach and sharing of data for global comparisons. European Survery results were not available at time of going to print.

1 The ‘Other disclosure requirements’ section includes disclosures related to the INREV NAV, and INREV Fee Metrics.


1 THROUGH THE LOOKING GLASS

PERSPECTIVES ON THE EVOLUTION AND TRENDS IN REPORTING PRACTICES IN ASIA-PACIFIC

The Asia-Pacific region continues to be a dynamic landscape, offering opportunities and challenges, sometimes in equal measure. In an environment such as this, where demands and practices as constantly changing, many fund managers are adjusting their operations accordingly. As part of the 2015 review process, with broader shifts taking place in investor needs and expectations, during the interviews with participating fund managers and investors, we went beyond the development and compliance with the 2014 INREV Guidelines, to discuss themes that as a whole portrayed an ongoing evolution of investor reporting in Asia-Pacific. The key themes and related perspectives which were voiced by fund managers and investors during our review are examined below.

Valuations and Portfolio Developments – A 360° view

In light of the recent economic developments in China and some of the other markets in the region, it was no surprise that investors and fund managers were both of the view that the accuracy and robustness of investment valuations remains their foremost concern, with the communication of qualitative developments and other investment intricacies having equal standing and footing with quantitative disclosures. Such perspectives have reaffirmed the shift in expectations that began a number of years ago, with more information being communicated on a quarterly basis.

There is an acute understanding across the region that the valuation process is a fundamentally challenging area even with a fund manager’s best efforts to have granular reporting, going through an external valuation review process, and operating valuation committees. In light of these challenges, it was interesting to note from the interviews with investors, fund managers, and valuers, that they were fundamentally aligned with one another, each had a slightly different take on valuations and the valuations process. Their respective perspectives, either as a summary or a quote, have been set out in Table 2 below.

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TABLE 2 — VALUATIONS — A 360° VIEW OF STAKEHOLDER EXPECTATIONS

Expectations Investors Fund Managers Valuers

Overall “We are strict on the valuations process, requiring independent valuations annually, and engaging external well-known valuers. Reports will be compared for reasonableness with internal management valuations.”

All fund managers require their funds’ portfolios to be independently valued on an annual basis. To fulfil this, they employ:

“Only large and well known external valuers are engaged for the level of trust and (to meet) bank financing requirements.”

Valuation practices have matured. 10 years ago some of the valuations that they came across may not have been based on sufficient support; they may not have had access to, for example, a floor plan of the building, or rent rolls to base a valuation on.

Depth of valuations

“We look to not only appraise the underlying property, which most fund managers engage valuers to do, but also the company that the property is held in.”

Most fund managers require a full-scope valuation annually of their entire portfolios by an independent valuer, as opposed to say a desktop review. Managers will also perform internal roll-forward valuations on a quarterly basis.

Fund managers are often price-sensitive to valuation fees. There may not be a fundamental understanding on the valuation work being performed. Cheaper fees would still mean valuations are done properly, but no time can be budgeted for explaining or giving underlying assumptions.

On the valuation standards applied

“We expect that valuations are performed in accordance with recognized valuation standards.”

“We expect that valuations are performed in accordance with internationally recognized standards in most markets, and country specific standards for others.”

“We will perform our valuations in accordance with the relevant market standards, or if agreed, internationally recognized valuation standards.”


Expectations Investors Fund Managers Valuers

On the use of comparables

“In emerging markets (such as second or third tier cities) where markets are illiquid, any reasonably comparable transaction details are opaque. We would need more information on these transactions to understand how they were identified.”

“In a place like China, things are liquidity driven. For properties in Tier 2 & 3 cities, we have seen valuers use comparables from cities hundreds of miles away. However, this may not work sometimes, as in some cases the relevant comparable might be a corner store, which is clearly different from a shopping mall.”

“There are always comparables available when looking to perform a valuation. It is just a case of choosing the best from all available comparables (e.g. For Vietnam, Jakarta can be taken as a proxy).”

On differences with internal valuations

There was a greater demand by investors to also ensure that they understood the underlying developments relating to the properties held by the funds, to better understand the changes in valuations.

“We have to play a very straight bat with our valuers. We do not try to influence them, we would comment on parameters used by valuers, but would not force valuer to adopt them.”

“Fund Managers/GPs usually don’t want volatility in the property valuations.”

It was interesting to note from these discussions that the wider industry’s view on external valuations were aligned, where they stated that the valuation process should not be influenced, even if there was a disagreement, as the whole point of conducting the exercise was to get independent third party valuations. Even though fund managers stuck to the external valuations, they all believed it was essential to oversee the independent valuation process and have a preliminary review of the valuer’s conclusions. These fund managers would seek to ensure that the valuers had all the necessary information to complete their valuations and provide additional information if needed to support any differing view.

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The only exception to that view was held in markets such as India, where valuers tend to use local valuation standards, rather than international standards, such as the RICS “Red Book”, which are more widely adopted around the region. In situations such as these, fund managers generally raised these differences to investors, though a few managers still believed that they should adjust figures if they did not agree with external valuers, and relied on their internal process and disclosures to investors to ensure due governance. In certain instances notably only for closed-ended fund, some managers felt that the general partner had a duty to amend external valuations which were deemed to be unreasonable.

Another key observation that has re-emerged was the use of a panel of valuers approved by fund managers. The panels tended to include larger valuers. The decision to use these valuers tended to stem from the funds’ operational considerations including investor requirements, approval by lending banks, and consistency across the portfolio. However, considerations such as valuer rotations, and local market knowledge, were cited for using local players, where relevant.

It is evident from these observations that the most crucial element in the valuation process is not something technical, but communication and transparency by fund managers. This will continue to be critical in the coming months and years, when portfolios are being reviewed in potentially challenging market conditions.

ESG – Looking Ahead

Another area that continues to take root in the industry is environmental, social, and governance (ESG) analysis. The key developments from the prior years are in the following 2 areas.

1. Depth of the analysis: The ongoing shift from simply participating in surveys such as GRESB’s and to a lesser extent this review, to a more in-depth adoption of ESG analysis in the investment decision making process and in capital expenditure plans; and

2. Geography: While Australian managers continue to dominate this space, more and more fund managers from the rest of the region have started to step up in this area, owing to a combination of investor demand, regulatory incentives/pressures, and to a lesser but increasing degree of internal demand for better ESG performance.

Given this ongoing evolution, and INREV’s current exercise of updating it’s Sustainability Guidelines supported by ANREV, in the “Snapshot” section of this report, we look at the developments taking place, and the views on what implications they would have on funds’ operations and reporting going forward.


The How – Mediums of Reporting

Having highlighted in the prior year the growing role technology plays in investor reporting (through webcasts and investor reporting portals), it was no surprise to see its continued expansion in the current financial year, with most fund managers considering implementing the use of portals, if they had not already done so. In this regard, fund managers adopted different approaches, with some using internally-built databases, while others opted for a Microsoft Sharepoint solution, or dedicated service providers such as Intralinks or Investment Café.

The 2 key drivers for this sustained push have been accessbility and security.

In terms of accessibility, the use of a web-based portal/repository would allow fund managers to readily share any news, information, financial reports, investor statements, and updates to standing information with investors right away, without having to wait to print out e-mailed reports. This would allow for not only a streamlined dissessmination process, but also give investors a repository of files and key information. It is for this reason that fund managers (either directly or through placement agents) have increasingly adopted the use of data rooms to facilitate investor due diligence, when raising capital for funds.

In addition to the ease of use, security is an often cited reason for the greater implementation of such portals. Given such portals tend to adopt tighter security measures, the chances of such reporting being intercepted or being shared with non-investors, being reduced.

Despite this general push to make greater use of technology, some fund managers having a smaller concentration of investors, going the ‘extra mile’ and building such a platform or contracting a service provider to do so, was not deemed to be cost effective. Besides this, for key communication and for capital calls or distributions, good old fashioned paper was still the preferred route.

Overall, fund managers in the region were comfortable with the combination of reporting mediums that was adopted, where most chose to make the reporting available on web portals/by e-mail, complemented by quarterly investor calls, and annual in-person meetings or investor conferences.

Flavour du jour? – Separately Managed Accounts

With markets having been stable for much of the year, capital raising was once again a key activity for fund managers. One key difference for a lot of them, particularly the larger players, was the greater proportion of separately managed accounts when compared with funds, that fund managers were looking to set up.

The ongoing use of separately managed accounts is being driven by larger regional allocations giving asset purchasing power to institutional/larger investors, who are keen to get ‘closer to the action’, and have more control over purchase/acquisition decisions, rather than investing solely through pooled fund vehicles. Whilst there may be different contractual terms on the operation and reporting of a managed account, investor reporting, which would tend to be shaped by negotiations with the investor, would generally be far more transparent. The INREV Guidelines, therefore, would need to continue in their evolution to set out a framework for fund managers to report under such structures, but be mindful that investors may heavily tailor them to suit individual accounts.

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2 UNDER THE MICROSCOPE

COMPLIANCE WITH THE REPORTING MODULE OF THE 2014 INREV GUIDELINES

What a difference a year makes! Following the launch of the new INREV Guidelines in April 2014, and the subsequent 2014 investor reporting review (based on these Guidelines), many fund managers took time out to review and update their quarterly and annual investor reporting templates and deliverables for FY 2014 and beyond. It is clear to see from this year’s results and feedback that these efforts have borne fruit. We also expect further improvements next year as several managers plan to review reporting for their new funds currently being marketed.

The results of this year’s survey are set out below. These overall results have been set out, before analysis is presented by geographic mandate, style, and GAAP. The results have then been analysed in greater depth by each of the eight sections of Module 2.

A. Overall Results

I. Headline Performance

As set out in the executive summary, and above, the headline compliance with the INREV Guidelines on Reporting has moved up to 68% this year, from 57% last year; where non-traditional reporting mediums (e.g. web portals for sharing of items such as standing information) are accounted for, the overall compliance rises further still to 72%. Additionally, regarding the 30 funds that participated in both this and last year’s survey (termed in this report as “recurring” fund participants), they achieved a headline compliance of 70%, while the 17 new fund participants averaged a compliance of 64%. The difference between the recurring and new participating funds can largely be attributed to recurring funds having the benefit of a year’s ‘head start’ in incorporating the Guidelines, particularly for larger managers with more resources to implement these changes.

This increase in headline compliance is reinforced by the increase in the overall proportion of funds that comply with over 50% of the Guidelines, with the proportion of funds doing so increasing to 91% (or 43 out of 47 funds) from 58% (or 24 out of 38 funds) last year. The number of funds complying with over 75% of the Guidelines has also increased from 11% last year to 30% this year. Such marked shifts demonstrate that the increases observed in this year’s reporting are not anomalous, and apply across the spectrum of participants. A detailed breakdown of the performance distribution by quartile of the participants is set out in Appendix 2 — Detailed Compliance Results.


Despite the overall increase from last year, areas of non-compliance do exist, and given this, we have set out below the primary reasons that were typically identified for non-compliance, together with the individual guideline requirements or sub-requirements that funds are still looking to implement.

Reasons for non-compliance

During the private feedback sessions, fund managers were asked to provide reasons why they did not comply with each of the INREV Guidelines requirements not met. These have been broadly categorised into the following themes:

• NewGuidelinesandrequirementsnothavingbeenincorporatedintothe2014/2015reportingcycle, was the most prevalent reason for non-compliance. Fund managers (particularly new participants) stated that they would need to be more proactive in keeping up with changes, and adopting future changes on a more real time basis. During the feedback sessions, they actively sought advice and tips on how to better align their reporting with regional best practice, overall, and by style and how their peers were addressing those requirements too;

• CertaindisclosuressetoutintheGuidelineswerefelttobenotrelevantfortheirinvestors.This was especially the case for recurring participants, where fund managers shared that their investors were largely happy with the existing reporting, and a conscious decision has been taken to omit these disclosures. This is expected to be less of a factor going forward with the tailoring of the INREV Guidelines; and

• Requirementsrelatingtoinformationthatwasalreadyavailabletoinvestorselsewhere,either readily (through investor portals) or on request, but was not specifically contained in, or referred to in funds’ periodic reporting. Where information relevant to the Guidelines’ requirements was included within static information, and linked from periodic reporting, the reporting was treated as compliant in the scoring.

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CHART 1 — OVERALL LEVEL OF COMPLIANCE BY SECTION, AND BY NEW SURVEY PARTICIPANTS VERSUS PARTICIPANTS FROM LAST YEAR’S STUDY — LEARNING FROM THE OLD PLAYERS

Recurring 2015

New Survey 2015

Overall 2015

Overall 2014

0%

20%

40%

60%

80%

100%

Fund documenta-

tion for reporting

framework

Content and frequency of

reporting

General verhicle

information, organisation

and governance

Capital structure and vehicle-level

returns

Manager’s report

Property report

Risk Management

Other disclosure

requirements

Overall

Com

plia

nce

wit

h G

uid

elin

es (%

)

Sections of the Reporting Module

Chart 1 above shows the breakdown of the overall compliance of the Guidelines, where compliance within the eight sections for the current year ranged from 21% to 86% (20% to 80% in the prior year).

With the exception of two sections where no significant change was noted (i.e. Reporting and Content, and Other Disclosures), the chart illustrates that there have been substantial increases in compliance (with most greater than 10%), across the other sections.

When analysing the performance of recurring funds against that of new ones, one can note that existing funds as a whole outperformed new ones across all categories, with the biggest ‘gaps’ between the two groups being in the General Organisation and Governance, Capital Structure and Returns, Manager’s Report, and Property Report sections.

An in-depth analysis of the performance by the eight individual sub-sections is set out in Part B of this section of the report.


As mentioned above, a big contributor to this higher performance was the fund managers’ process of going through the 2014 Survey’s feedback and incorporating relevant comments and changes into their reporting. From the feedback sessions, it was noted that one fund manager had gone deeper and further than their peers. In doing so, they raised their compliance to a near perfect score. Their story is shared below.

Case Study: M&G Asia Property Fund’s journey to compliance with the Guidelines

The Profile:Fund: M&G Asia Property FundStyle — Structure: Core – Open-endedGeographic Mandate: Asia-Pacific

The Headline: From a compliance score of 97% in 2013, to 90% in last year’s review, and then having the top compliance score in this year’s survey of 98%, M&G Real Estate has made remarkable strides in improving their compliance with the INREV Guidelines each year.

The Journey: While investors did not demand and request the fund’s to comply with the INREV Guidelines, 3 years ago, management at M&G Real Estate concluded: “There is no reason why we should not attempt to comply with the Guidelines”. With that decision, the management team reviewed the 2013 INREV Guidelines, to prepare its investor reporting in accordance with them, and investor data requests in accordance with the SDDS.

In its pursuit of this goal, in 2013, M&G Real Estate engaged its fund’s auditor to independently review all of the fund’s reports, checking their compliance with each module of the Guidelines, while the Audit Committee and Board of Directors, also participated in an internal review, even hosting a Q&A section for an in-depth review on each module. For guidelines where the fund was non-compliant, management would revisit them, looking to amend their investor reporting accordingly.

With the launch of the new Guidelines last April, management repeated the same process in assessing the changes to the Guidelines. As a result of this annual review process the fund increased its compliance each year.

During our feedback session with them, they stated that the 2014 Guidelines were clearer in the summarizing how a fund’s fee structure impacts its capital structure and fund level returns, as well as the expense ratios. There were still some of the old guidelines which management preferred, including the guideline covering modification on the property tax description.

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2 The heat map represents not only the current year’s performance, which are percentages shown in the table, but also the percentage point change from the prior year; cells shaded in red representing increases from the prior year’s review; those in blue representing corresponding decreases; and white representing a new grouping. The darker the shade, the greater the percentage point change — increase or decrease.

II. Performance by Style/Structure

TABLE 3 — HEAT MAP2 OF COMPLIANCE BY SECTION OF THE REPORTING MODULE AND BY FUND STYLE

Sections of the Reporting module of the Guidelines

WeightingCore

(open ended)Core

(close ended)Opportunity (open ended)

Opportunity (close ended)

Value added (open ended)

Value added (close ended)

No. of Funds 16 2 1 18 1 9

Fund documentation for reporting framework

2% 66% 100% 50% 43% 50% 61%

Content and frequency of reporting

6% 80% 90% 80% 82% 80% 73%

General vehicle information, organisation and governance

12% 80% 55% 78% 58% 70% 60%

Capital structure and vehicle-level returns

6% 97% 71% 90% 85% 83% 74%

Manager’s Report 17% 91% 79% 85% 86% 68% 83%

Property Report 29% 75% 79% 75% 72% 94% 70%

Risk management 13% 83% 67% 70% 63% 77% 60%

Other disclosure requirements

15% 11% 50% 9% 17% 25% 39%

Overall 100% 73% 74% 67% 63% 68% 65%

Degree of change (in percentage points):

<-30% 0 to 10%

-30% to -21% 11% to 20%

-20% to -11% 21% to 30%

-10% to 0 31%+


When broken down by section of the Guidelines and fund style, we noted that there was an underlying increase across styles (core, value-added, and opportunity), as well as by structure (open and close-ended). While decreases were observed (in the Reporting and Content, Risk Management, and Other Disclosure Requirements sections), it was noted that most were marginal decreases, and usually because of guidelines that required a degree of static or information, e.g. descriptions of the reporting, risk, and governance frameworks of the fund, which were not disclosed in the annual or quarterly reporting, but shared through other mediums or documents. In Part B of this section, tips for best practice around reported through other mediums.

As noted in previous surveys and observed once again this year, open-ended funds generally performed better than closed-ended funds across all three styles, though closed-ended funds have somewhat closed the gap. This is not surprising as most of the open-ended funds tend to operate in more transparent setting, where market practices for open-ended funds has developed to a great degree.

For closed-ended funds, as they tend to have fewer investors, who have longer holding horizons, they get their comfort from an ongoing dialogue with the respective fund managers, hence require less information to be presented in quarterly and annual reports. The adoption of different mediums by closed-ended funds to meet some of the Guidelines requirements, and their incorporation into this year’s reporting process, have contributed to them closing the gap on their open-ended peers.

Of the three fund styles, once again core funds scored better than either the value-added or opportunity funds. This year there was very little to chose between structures, core closed-ended funds surprisingly scoring slightly better than their open-ended counterparts. Apart from this, it was interesting to note that the difference between the compliance of value-added and opportunity funds is marginal, with the former group outperforming the latter by only 1-2%.

As the Guidelines become either tailored or attributed to suit each style of fund, it will be interesting to see how the compliance levels and distributions evolve, we would expect compliance to increase, and the differences in compliance levels between strategies to reduce.

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3 The heat map represents not only the current year’s performance, which are percentages shown in the table, but also the percentage point change from the prior year; cells shaded in red representing increases from the prior year’s review; those in blue representing corresponding decreases; and white representing a new grouping. The darker the shade, the greater the percentage point change — increase or decrease.

III. Performance by Geographic Mandate

TABLE 4 — HEAT MAP3 OF COMPLIANCE BY FUND STYLE AND GEOGRAPHIC MANDATE

Fund Style/structure

Country Strategy — Geographic Mandate

OverallSingle Country Multi-CountryAustralia Japan China Others

Core

Open ended 74% — — 74% 76% 72%

Close ended — 56% — — 86% 71%

Value Added

Open ended — — — — 72% 72%

Close ended — 52% 68% — 68% 65%

Opportunity

Open ended — — — 76% 64% 64%

Close ended — 58% 60% 59% 69% 64%

Overall 74% 53% 63% 70% 71% 68%

Number of funds 11 7 5 4 20 47

Proportion of Top Quartile Performers

25% 8% 0% 8% 59% 100%

Degree of change (in percentage points):

-20% to -11%

-10% to 0

0 to 10%

11% to 20%

21% to 30%


Looking at the levels of compliance with the Guidelines, by fund style, and country strategy, the findings can be broken down as follows:

• Leading the way: With a 5% increase in compliance from their performance in the prior year, Australian funds continue to outperform funds with other geographic mandates. The Australian property market is viewed as being very transparent, which we presume helps managers source underlying data to aide compliance. The ‘Multi-Country’ funds fared better than most single country funds, thanks in large part to the performance of their core funds, which even outperformed the Australian country funds.

• Middle of the pack: China and ‘Other’ single country mandated funds have also shown significant improvement from the prior year’s review, with compliance increasing by 19% for the former group, and 32% for the latter. The performance by the ‘Others’ group, which included mandates in India and Korea, benefited from open-ended funds, which were first-time participants.

• Playing catch-up: The sole exception to the improved performance seen across other geographic mandates, belonged to Japanese funds. The reason for this relatively softer performance was in part due to the choice of GAAP (which is analysed next), but also because managers there are only familiarising themselves with the Guidelines this year, and so are still working their way up the Guidelines ‘curve’.

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IV. Performance by GAAP

In the 2014 Edition of the Guidelines, there is no longer a specific section on financial reporting, as requirements from this section within the Old Guidelines have now been split between other sections in the current version.

Choice of GAAP continues to be heavily correlated with overall compliance, as annual reports, including audited financial statements, play an integral part in the investor reporting ‘dialogue’. Therefore, to shed some light on the relationship between GAAP and compliance with INREV Guidelines, we analyse participating funds performance by GAAP (in Chart 2 below), and further by how the investment portfolios are accounted for (in Table 5).

CHART 2 — LEVEL OF COMPLIANCE BY ACCOUNTING STANDARDS ADOPTED

IFRS

AASB

OTHERIFRS

EQUIVALENT

US GAAP

JAPANGAAP

OVERALL

0

10 20 30 40 50 60 70 80

GA

AP

Level of Compliance (%)

2015 2014

While the overall compliance of both US GAAP and the IFRS (and its equivalents) funds improved, the performance of the IFRS funds (even after excluding the Australian funds), was on average 3-4% better. The reasons for this are the detailed disclosure requirements in IFRS standards, such as IFRS 7’s risk management disclosures; and the full consolidation of portfolio operating companies, which is further analysed below.


With the revised IFRS 10 Consolidated Financial Statements standard being effective in 2014, many fund managers underwent a process of evaluating whether or not the fund would qualify as an “Investment Entity”4, as defined by the standard. If the fund is an Investment Entity, the fund would need to fair value their holding companies, adopting a similar approach to that used under US GAAP for Investment Companies. While this will simplify the fund’s financial reporting, it will also likely reduce transparency and decrease compliance with the Guidelines.

The process of evaluation is not a policy choice, and is a highly judgemental, as the definition of Investment Entity is complex and subjective for real estate funds. To add to the complexity, the prevailing sentiment from fund managers (both this year and last), was that changing the accounting of the portfolio investments for existing funds to reduce the transparency of the portfolio would not be taken well by investors.

As a result of this, in the analysis of how portfolios are accounted for (Table 5 below), it was not surprising to see very few IFRS funds shift from Consolidation to Fair Value, with only five respondents adopting the Investment Entities approach.

Despite this “slow start out of the gate” for the revision to IFRS 10, it is expected that more and more of the funds that are being raised and launched, would re-evaluate its requirements, and how best to supplement the streamlined financial statements disclosures under IFRS 10, with additional information in other sections of the annual report. As one fund manager put it:

“Investors are more interested in knowing the NAV of the fund and (qualitative) property information… they are more interested in their capital account report & share of fees! Consolidated numbers are not really the key focus.”

The only outlier in this analysis, is a fund preparing its reporting in accordance with Japan GAAP, which continues to require a cost-based approach. As such, with no fair value and the associated descriptive disclosures required under other GAAPs, it is not surprising to see that the overall compliance for this GAAP has not changed significantly from the previous year. This contrasts with other Japan-mandated funds, which prepared financial statements on a fair value basis, and consequently had a higher compliance.

4 The definition of an investment entity, and the possible implications for real estate funds can be found in the following links: IFRS 10 (Revised): http://www.ifrs.org/Current-Projects/IASB-Projects/Consolidation/Documents/Investment-Entities-Amdments-to-IFRS-10-12-and-IAS-27-summary-and-feedback.pdfIFRS 10 – Impact for Real Estate Funds: https://www.pwc.lu/en/ifrs/docs/pwc-ifrs-in-depth-investment-entities-amendment-exception-to-consolidation.pdf

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TABLE 5 — RESPONDENTS BY ACCOUNTING STANDARDS

Accounting/GAAPFY 2015 FY 2014 FY 2013

Number % Number % Number %

Consolidation/Equity Pick-up and fair value at asset level

IFRS 18 38 19 50 20 40

Australia IFRS 11 23 10 26 13 26

Other IFRS 3 7 1 3 1 2

Sub-total 32 68 30 79 34 68

Fair value of projects at fund level

US GAAP 9 19 6 15 10 20

IFRS 5 11 0 0 0 0

Sub-total 14 30 6 15 10 20

Cost based

Japan GAAP 1 2 1 3 4 8

IFRS 0 0 1 3 1 2

Australia IFRS 0 0 0 0 1 2

Sub-total 1 2 2 6 6 12

Total 44 100 38 100 50 100

* Notes— There is one fund (FY 2014: 1; FY 2013: 3) reporting under IFRS with investments held through joint-venture

investment structures, and recorded under the equity method. The underlying investments held by the joint-venture entities are booked at fair value in two of the funds and at cost less impairment in the other one.

— No IFRS or equivalent funds had early adopted Investment Entity reporting (which fair values projects at the fund level) in FY2014 and FY2013.

To gain further understanding of the areas and types of non-compliance, the assessment results for each of the individual sections of the current INREV Guidelines are presented next.


B. INREV Guidelines Reporting Module — Section Results

I. Fund Documentation for Reporting Framework

Purpose: This section of the Reporting Module of the Guidelines, which include only two requirements, sets out the high-level basis for a fund’s reporting framework, and whether a fund defines key terms included within the reports.

Overall Compliance level: 57% (Prior Year: 41%)

Noteworthy Requirements:

INREV Guidelines Reference

INREV Guidelines Description2015

Compliance %2014

Compliance %

FD 19Does the fund documentation include the basis, the frequency and timing of the preparation of the annual reports?

37% 42%

FD 20Are terms not defined in 12.1 Definitions defined in the annual report?

100% 67%

Insights: This section of the Reporting Module consists of two requirements, the marked increase was driven by compliance with FD 20. Conversely, there was a decrease in compliance with FD 19, as the basis and timing of reporting were more often not included in either annual or quarterly reporting, or other documentation being made available to us.

A common observation across the region was that this information is often set out in a private placement memorandum (‘PPM’), limited partnership agreement (‘LPA’), and to a lesser extent, static pages in investor reporting portals, which do not form part of the annual or periodic investor reporting process.

Our Top Tip for better compliance —FD 19

As the basis, frequency and timing of reporting (specifically for the annual report of the Fund) is stated in their LPAs or PPMs, and does not get refreshed on a quarterly or an annual basis, most fund managers do not want to “bloat” their periodic investor reporting by repeating this static information. It is thus suggested that fund managers make reference in their reporting (whether in their annual or quarterly reports, or webcasts, or calls), to this documentation. For funds that have investor portals, with a ‘reporting timelines’ section or webpage, similar references can be made with hyperlinks to relevant documents.

This will not only improve compliance with the guideline, but also serve to keep investors up-to-date on the expected reporting basis and timelines.

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II. Content and Frequency of Reporting

Purpose: This section of the Reporting Module of the Guidelines sets out what statements and items should be included within reports to investors, particularly the annual report.



Best performers:



Compliance %2014

Compliance %

RG 3Is the annual report in a consistent format throughout?

100% 100%

RG 4

Does the annual report contain:• Balancesheet?• Incomestatement?• Statementofchangesinequity?• Statementofcashflows?Notes to the financial statements?

100% 99%

Worst performers:



Compliance %2014

Compliance %

RG 7

Does the annual report disclose the level of compliance with INREV guidelines on a module by module basis? This should include any relevant explanations, reconciliations and calculations.

9% 0%

RG 7Has management reviewed the above statement concerning the level of compliance with INREV Guidelines?

11% 3%


Insights: Compliance with this section of the Reporting Module has not fundamentally changed from the prior year. A key reason continues to be the low level of compliance with RG 7, given its specific link to the INREV Guidelines themselves. Most fund managers stated that they did not know how best to go about making such disclosures in light of the fact that all but a few funds had a minority of European-based investors, who would be the most likely group of investors requiring such information. Furthermore, many fund managers were worried that they were not fully compliant with all the modules of the INREV Guidelines, given the subjectivity and judgement required in applying all of them. As such, fund managers were understandably wary of making this disclosure in their periodic reporting, with one fund manager stating:

“What does ‘full compliance’ mean, 100%?, 98%? With many points subjective, can we make such a claim?”

Our Top Tip for better compliance — RG 7

While it is encouraged to comply with all modules of the INREV Guidelines, for a fund to be compliant with RG7, it simply needs to include in its reporting the degree it complies with the INREV Guidelines. Therefore, a fund’s reporting would simply needs to state which modules they comply with, even if it the fund is non-compliant with certain modules.

Furthermore, while fund managers are happy to disclose this information on an ad hoc basis, it is best practice for them to inform all investors, either in their periodic reporting, or other means (through webcasts, calls, etc.) that such information is available upon request.

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III. General Vehicle Information, Organisation and Governance

Purpose: This section of the Reporting Module of the Guidelines sets out the key underlying information of the fund and its organisation that should be circulated to investors. It includes both strategy-related information, and an explanation of both fund and vehicle level governance.



Best performers:



Compliance %2014

Compliance %

RG 10Does the annual report include:name?/domicile?/legal form? /fund style?/description of fund structure/year-end?

98% 98%

RG 16a short, high level summary of the fund strategy?

94% 84%

Worst performers:



Compliance %2014

Compliance %

RG 15a description of the level of compliance with the corporate governance framework defined in the fund documentation?

26% 18%

RG 14the level of adoption of INREV corporate governance best practices?

7% 0%


Insights: While compliance with this section had improved from the prior year (owing to improved compliance with guidelines such as RG 16), it continues to be relatively lower than what one might expect. The two primary reasons for this are:

1. Static Information: Some of the fund managers felt that some of the requirements in this section require a fund to disclose information that is “static”, and wanted to avoid ‘bloating’ their reporting. An example of this is RG 13, which requires a discussion of vehicle governance and oversight frameworks, such as the use of independent directors and special committees and how they operate. Compliance with this guideline was only 51% this year and 42% last year, as many managers stated a preference for keeping their reporting focused, and not adding information contained in an offering document, unless it had changed.

2. Discussions: The guideline in this section now require a discussion on the operations of and compliance with the governance framework adopted by the fund, which is where RG 14 and 15 come in. While most fund managers do not necessarily adopt the INREV corporate governance best practices (RG 14), it was interesting to note that only a quarter of funds disclosed the level of compliance with their own stated frameworks (RG 15).

While many had to contend with internal compliance and legal protocols around reporting, the often cited reason for this relative lack of disclosure was the preference to report compliance and governance matters by exception. However, it was encouraging to note was that the funds that did report such information, and thus complied with these guidelines did have in-depth disclosures, with one group of funds reporting a full checklist of governance practices, and the level of compliance with each item.

We continue to note a difference in opinion between fund managers on how best to achieve better compliance with this aspect of the section, with some preferring to include this information within the quarterly and annual reporting, and others preferring to include through other channels disclosing it only within their investor web portals.

Our Top Tip for better compliance — RG 14 & 15

As corporate governance is a fundamental part of a fund’s operations, we would recommend that fund managers should look to keep investors updated on an ongoing basis about the level of their fund’s compliance with their own framework by sharing information periodically on board and committee discussions and resolutions.

Furthermore, in assessing the fund’s corporate governance against best practice, managers should look to use INREV’s tool to perform a self-assessment against INREV’s corporate governance framework:(https://www.inrev.org/guidelines-tool/corporate-governance-self-assessment/questionaire.php)

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IV. Capital Structure and Vehicle-level Returns

Purpose: This section of the Reporting Module of the Guidelines sets out the required disclosures fund managers would need to make in relation to a fund’s capital structure, its movement (i.e. subscriptions/calls, redemptions/distributions etc.), returns and the impact of fees on performance.



Best performers:

INREVGuidelines Reference


Compliance %2014

Compliance %

RG 19Any material changes to the capital structure of the fund?

97% 92%

RG 23Does the annual report disclose and discuss distributions made during the period and subsequent to period-end?

95% 71%

Worst performers:



Compliance %2014

Compliance %

RG 22Does the annual report disclose and discuss details of share class NAVs and their evolution since prior period-end?

73% 59%

RG 21

Does the annual report summarise and comment on key investor returns and related metrics including comparison with targets, benchmarks and relevant indices?

64% 47%

Insights: While compliance with this section was relatively high in the 2014 review (among the sections), it is now also high in an absolute sense, with performance skyrocketing from 63% to 86%, as net increases in compliance were noted for every guideline. This is in line with what we would expect, as the guidelines in this section require disclosures that most funds would ordinarily presented in their annual audited financial statements.


There were however two guidelines, namely RG 21 and RG 22, that relatively ‘under-performed’.

In the case of RG 21, while participating funds indicated the level of returns that their funds earned during the year, some were still unable to compare them against a target or benchmark/relevant index.

A common issue still cited was the lack of any relevant and robust benchmark, especially for the pan-Asian funds, where fund managers had concerns about the quality and depth of data being used for the few benchmarks which are published. This was consistent with what was observed in participants resporting, as the only funds that were able to, were those that operated in developed markets like Australia where benchmark indices are readily available, and those that had a pre-determined internal target.

In respect of NAV related reporting (RG 22), while all participating funds discussed the key performance factors in their quarter and year end reporting, for those with share class NAVs, it was observed that some fund managers did not take this disclosure a step further and discuss performance at the share class level. In discussing this with fund managers, given the sensitive nature of the matter, they opted to share such information with investors individually.


For fund managers that are unable to determine an appropriate benchmark, or conclude that benchmarks such as those provided by ANREV and other bodies might not be as appropriate for their fund(s) in light of their specific strategy, they can consider incorporating performance against their internal target return into the fund’s periodic reporting.

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V. Manager’s Report

Purpose: This section of the Reporting Module of the Guidelines sets out what information fund managers need to include in their reports, from the effects of macro-economic factors and significant events affecting the fund, to the fund’s performance and fees.


CHART 3 – COMPLIANCE (BY STYLE) WITH INDIVIDUAL GUIDELINES IN THIS SECTION OF THE GUIDELINES

RG.25 RG.26 RG.27 RG.28 RG.29 RG.30 RG.31 RG.32 RG.33 RG.34

0

10

20

30

40

50

60

70

80

90

100

Opportunity OverallCore Value Added

%



Best performers:



Compliance %2014

Compliance %

RG 28

Does the annual report describe and comment on the structure of fee arrangements with managers and affiliates (including details of: fund management fees, asset management fees, performance fees, property management fees, acquisition fees, disposal fees, development fees, financing fees, other fee related party fee arrangements)?

95% 56%

RG 27

Does the annual report include an analysis of the performance of the fund during the period by reference to:• relevantfundlevelKPIsincludingthe

NAV?• keyfinancialratios?• valuationresults?• realisedgainsandlosses?• informationrelatedtooperatingresults?

97% 79%

Worst performers:



Compliance %2014

Compliance %

RG 30Does the annual report discuss the current period performance in the context of the last five years?

63% 11%

RG 29

Does the annual report disclose:• theNAVofthefundandcalculation

basis?• towhatextenttheINREVNAVguidelines

have been used to determine the INREV NAV? 3% Guidelines?

• detailsofadjustmentsmadetoreconcilethe NAV with the financial statements?

• adescriptionofthejudgmentsandestimates used when determining the NAV?

62% 56%

29

Insights: As seen from the statistics and graph above, the overall compliance with this section continues to be among the highest of all of the sections, with participating funds demonstrating an increase in compliance by 16 percentage points from the 2014 review.

Despite this strong overall compliance, there were still a few guidelines where participants did not perform relatively well. Of note were RG 29 and RG 30.

In the case of RG 29, most fund managers did not include the INREV NAV in their funds’ periodic reporting, saying that few investors requested such information. They also did not want to confuse investors who were not familiar with the metric, and the adjustments required in its preparation (predominantly non-European based ones). As such, in most instances, managers stated that the INREV NAV was in fact prepared, but was only shared on an as-needed basis.

Unlike RG 29, there was a considerable increase in compliance with RG 30. Despite this though, there are still some funds, where applicable, which disclose the performance of their funds over the past five years, but they do not discuss the performance movements in detail. As with many of the other new guidelines, disclosure on its own is not sufficient; a discussion of the performance is required.

Our Top Tip for better compliance —RG 29

The downside of not disclosing the INREV NAV, and its supporting adjustments in the fund’s periodic reporting is that investors would not know that such information has been prepared and is available, until they request it.

It is therefore suggested that funds include in their reporting a statement informing investors that either that information can be found on a page in their investor portals (with a link), or that this information is available upon request.

Our Top Tip for better compliance —RG 30

While all funds presented their performance for the current year and prior year, doing so over 5 years, where relevant, would involve analysing how the longer-term market developments would interplay with the fund’s performance. Beyond simply disclosing the longer-term performance, the disclosure should aim to discuss its linkage with the fund’s overall strategy and target.


VI. Property Report

Purpose: This section of the Guidelines sets out what information fund managers should be including in their reporting, such as portfolio allocation and valuation, developments in rental and property value, concentration and occupancy of properties, and the impact of operating costs and capital expenditure on the fund.


CHART 4 — COMPLIANCE (BY STYLE) WITH INDIVIDUAL GUIDELINES IN THIS SECTION OF THE GUIDELINES

RG.35 RG.36 RG.38 RG.39 RG.40 RG.41 RG.42 RG.43 RG.45 RG.46 RG.47 RG.48 RG.49 RG.51RG.50 RG.53RG.52

0

10

20

30

40

50

60

70

80

90

100

Opportunity OverallCore Value Added

%

31


Best performers:



Compliance %2014

Compliance %

RG 49

Where material, does the annual report describe the impact of development activities on the fund by reference to its investment strategy, development pipeline, stage of completion of developments, status of the sale of units or rental strategies?

92% 65%

RG 36

Does the annual report describe the business rationale of any significant acquisitions or disposals during the period and the impact on the fund’s financial position and results?

88% 80%

Worst performers:



Compliance %2014

Compliance %

RG 48

If the operating costs are significant, does the annual report discuss the impact of specific factors such as service charge recoveries, bad debt write-offs and other property operating costs related to fund’s performance?

43% 11%

RG 47Does the annual report identify and comment on rental concentration risk? 40% 29%


Insights: The strong performance in the current year, where compliance had increased by 22% was built on improvements in compliance with guidelines such as RG 49, with more funds linking their developments to their strategy.

As set out in Chart 4, among the guidelines in this section, the performance of two guidelines in particular were outliers, where compliance was below average, i.e. RG 47 and 48. While compliance with both of these guidelines had improved from 2014, it was noted some funds merely presented the information, whether it was operating costs, or the rental concentration, but in either case they did not discuss their impact on the fund’s performance.


In relation to rental concentration risk, from the best practice observed, funds that complied with this guideline not only disclosed concentration (either visually or in percentages), but further presented rental profiles for funds in the years ahead, supplementing the numerical disclosures with the qualitative ones.

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VII. Risk Management

Purpose: This section of the Reporting Module of the INREV Guidelines sets out the organisation of the risk management function, the principal risks faced by the fund and vehicles, and the financing structure at both levels.



Best performers:



Compliance %2014

Compliance %

RG 60

Does the annual report describe and comment on the use of derivative financial instruments and their impact on the fund’s performance?

Does the annual report disclose their key terms and fair values and their treatment in the financial statements and NAV?

93% 88%

RG 57

Does the annual report give details of the overall financing structure of the fund in a tabular form?

Does the above table include information such as financing costs, security arrangements, recourse arrangements, maturity, interest and loan amortisation terms?

91% 67%

Worst performers:



Compliance %2014

Compliance %

RG 56Does the annual report describe and comment on specific breaches and remedial plans? 3% Guidelines?

25% 30%

RG 56Does the annual report describe the current level of compliance with risk management policies?

41% 37%


Insights: In line with the changes to other sections in the Guidelines, and much like the development of the General Vehicle Information above, most of these guidelines require information about the risk management frameworks, and commentary about each fund’s performance against those policies.

As with the other sections, there were improvements in the individual guidelines, including information on the fund’s financing structure. Despite this, compliance continues to be below that of other sections, as many of the fund managers did not include much commentary on risk management beyond what was required by the relevant accounting standards (e.g. IFRS 7). Fund managers continue to feel that some of the descriptions required were static and thus ought to be left out from the financial statements, particularly detailed policies setting out how they intended to achieve their risk management objectives. It was noted that certain fund managers opted not to make such disclosures, given that they viewed their risk management practices as proprietary, with one fund manager stating:

“We are not keen on sharing internal stuff. We are okay fielding questions from investors, but not actually giving policies and procedures.”


As with corporate governance, risk management is another fundamental part of a fund’s operations, we would recommend that fund managers, where permitted to by their own legal and compliance, should look to keep investors updated on an ongoing basis about the level of the fund’s compliance with its own risk management processes framework.

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VIII. Other Disclosures — INREV NAV & Fee Metrics

Purpose: This section of the Reporting Module of the INREV Guidelines sets out other disclosure requirements, including the adoption of the INREV NAV and Fee Metrics, and any deviations from third party valuations made by fund managers.



Best performers:



Compliance %2014

Compliance %

VAL 15

Does the annual report clearly explain and disclose deviations by fund managers from property valuations as determined by external property valuers?

35% 37%

FM 10

Does the annual report include a table that analyses all the components of the fees charged by the manager, including any element of performance fee or carried interest or any other such arrangement, or by any other affiliate or related party of the manager?

34% 32%

Worst performers:



Compliance %2014

Compliance %

NAV 3Does the NAV computation include explanatory notes and a description of key assumptions?

10% 6%

FM 9Are the elements of the metric calculation disclosed in the annual report?

13% 8%


Insights: Most of the requirements relate to the INREV NAV, and to a lesser degree on the Fee Metrics (such as TER, and REER). The overall compliance with INREV NAV related guidelines, including the explanatory notes, was low. As identified in the Manager’s Report section, there continues to be an improving, but disappointing adoption of the INREV NAV within wider investor reporting. Many managers prefer to report INREV NAV only to individual investors who request it, with some commenting that they did not want to confuse non-European investors who have little awareness, which is not surprising given that the INREV NAV is very specific to (non Investment Entity) IFRS reporting. With the absence of the INREV NAV, the various disclosures surrounding the INREV NAV will have a low level of compliance. This explanation extends to the fee metrics, which are often prepared on an ad-hoc basis.

One fund manager remarked that while the fee metrics were good to have, there was a bit of a grey area around how to apply them in certain instances. Some managers stressed that there are currently no clear recommendations on, for example, how to calculate the TER in cases where there were minority interests in an asset. This is a good example of why the current Global definitions project is needed, but from our interviews, different investors have different ways of managing information, so whilst a Global definition will be very useful, we expect that mangers will also need to prepare additional ratios under speciic instructions from their investors.

In relation to fee disclosures, an interesting output from many managers was the level of focus on related party fees from investor requests and onsite due diligence. With many managers charging related fees such as aquisition costs, administration, building management and broken deal expenses, most managers explained to us rigurous internal guidelines on the approval of such fees, and on their disclosure to investors. There were isolated cases where no specific policies were in place.

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3 SNAPSHOT

ENVIRONMENTAL, SOCIAL, GOVERNANCE AND INVESTOR REPORTING

It is on every fund manager’s mind and increasingly linked to their strategies — Environmental, Social, Governance (“ESG”) analysis. Over the past 12 months, we have noted that more and more fund managers have moved up the curve from building awareness internally, to taking more concrete actions in this area. The change builds on the the awareness of ESG analysis demonstrated by fund managers in the 2014 review.

The push for ESG making greater inroads into the minds and wallets of fund managers in this period has primarily been driven by the following parties:

• Investors:AgreaternumberofinvestorshaverequestedthatAsia-Pacificfundmanagersdomore in this area, by not only participating in the Global Real Estate Sustainability Benchmark (or “GRESB”) annual survey (which is covered in Part A of this Section), but also keeping ESG factors in mind when investing in new properties, and in developing or retrofitting portfolio investments.

• Governments:Regulationscontinuetobeabigpartoffundmanager’smotivationtopushforgreater ESG-related impact analyses in their portfolio decision-making process. As mentioned above, when developing or retrofitting portfolio investments, fund managers may adopt one of the region’s certification and efficiency standards. The various certifications will be touched upon in Part B of this section.

• Internally:Onceagain,abigpushforthisanalysisindecision-makinghascomeinternally,asthe traditional cost-benefit analysis has now incorporated such factors when making property development decisions. Where voluntary, and beneficial most managers have jumped in and made their developments greener, to in turn make their returns greener.

It is with this push that the implementation of ESG analysis is gradually snowballing within the region. Following on from this, INREV is currently updating its Sustainability Guidelines in collaboration with ANREV. The objective is to be able to measure and assess the impact on investment returns coming from sustainable investment efforts, therefore data reporting from the fund manager side is prerequisite. Consequently the priority was to revise the INREV Sustainability Reporting Recommendations, which were first issued in early 2012, to bring them to a current stage and align them with practiced market standards.

In the parts of this section that follow, we shall dive into Environmental and Social5 aspects, which are more nascent, as the discussion on Governance, which is more established in the region has been covered in the previous section.

5 The ‘Social’ aspect encapsulates factors such as labour standards adopted, operating practices, community impact.


A. Global Real Estate Sustainability Benchmark (GRESB)

The general consensus observed last year, has been reaffirmed, where fund managers have stated that investors are putting more emphasis on sustainability by requesting that fund managers participate in annual surveys, primarily the one conducted by GRESB, by submitting information regarding the sustainability performance of property companies and funds in 2014, with a view then to actively improve their compliance with sustainability benchmarks from 2015 onwards.

CHART 5 — 2015 GRESB SURVEY — OVERALL PERFORMANCE

0 50 100

50

0

100

Man

agem

ent &

Pol

icy

Implementation & Measurement

Europe

Other

North AmericaAsia

Australia/NZ

Source: 2015 GRESB Report

The 2015 GRESB report covers 37 countries across 6 continents, including Oceania, Asia, Europe, and North America. As shown in the chart above, it reflects the compliance level on management and policy and implementation and measurement by region, and how they compare against each other.

In 2015, the average Global GRESB score was 56. Of the regions, once again, Oceania (predominantly Australia) outperformed other continents with a GRESB score of 69. While Asia’s performance lagged behind Oceania’s it showed a steady improvement from the year before. As a result, in 2015, Asian funds performed comparably with their European and American counterparts.

39

These results are consistent with those from our survey, where it was observed that most participating Australian funds will disclose a separate section on ESG in their quarterly and annual reports, whereas for most other Asia-Pacific funds, reporting on ESG is usually limited to a short section, or no specific mention. From our survey it was noted that the difference in their performance is due to the influence of the government in promoting ESG policies and regulations, and in turn disclosure requirements. In this regard, there is a general pressure in the industry to have good National Australian Built Environment Rating System (NABERS) ratings, as disclosing these ratings are compulsory when renting out or selling property. As such, non-compliance was seen as putting them at a competitive disadvantage from their peers. In the rest of the Asia-Pacific building efficiency codes (such as those stated in Table 6), still remain voluntary. Aside from the government, there is more pressure from investors in the Australian funds, who would require information on a funds’ ESG activities, as this is one key aspect of their investment decision making process. This again contrasts with the rest of the Asia-Pacific participating funds, where most fund managers stated that the relative lack of disclosure was because few investors would mandate the disclosure of ESG-related information in their investor reporting. Despite these gaps between Oceania and Asia, it is expected that on this front, Asia and Asian fund managers will continue to improve on their performance in the coming years.

TABLE 6 — COMMON BUILDING CERTIFICATION AND ENERGY STANDARDS IN ASIA-PACIFIC(SOURCE: PwC Research)

Standards Description Region Website

LEED LEED (Leadership in Energy & Environmental Design) is a green building certification program that recognizes best-in-class building strategies and practices. To receive LEED certification, building projects satisfy prerequisites and earn points to achieve different levels of certification.

4,333 projects(China, India, S. Korea, and Taiwan)

http://www.usgbc.org/leed

Green Mark Scheme

The BCA Green Mark Scheme is a benchmarking scheme which aims to achieve a sustainable built environment by incorporating best practices in environmental design and construction, and the adoption of green building technologies.

1,127 projects (Singapore)

http://www.greenmark.sg/


Standards Description Region Website

Beam (HKGBC)

The Hong Kong Green Building Council (‘HKGBC’) strives to promote the standards and developments of sustainable buildings in Hong Kong. The HKGBC aims to raise green building awareness by engaging the public, the industry and the government, and to develop practical solutions for Hong Kong’s unique, subtropical built environment of high-rise, high density urban area.

690 projects(Hong Kong)

https://www.hkgbc.org.hk/eng/

CASBEE CASBEE is broadly used by many construction companies, design offices, real-estate developers, as a voluntary-basis evaluation tool for checking the environmental performance of their buildings.

450 certified buildings in Japan

http://www.ibec.or.jp/CASBEE

NABERS NABERS is a national rating system that measures the environmental performance of Australian buildings, tenancies and homes. NABERS measures the energy efficiency, water usage, waste management, and indoor environment quality of a building or tenancy and its impact on the environment.

Australia http://www.nabers.gov.au/

Of the standards set out above, while most are geography-specific, a large number of projects adopt international standards in their properties and projects, specifically LEED. This is in line with what other fund managers around the world adopt, as evidenced by the 2015 GRESB Report, which ranked LEED as the most-used green building certificaton scheme, with a 30% adoption.

It is expected that as building certififcation and energy ratings standards start to take hold in Asia, more and more fund managers will adopt them for their projects.

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4 TAKING THE VIEW IN

CONCLUSIONS AND NExT STEPS

A. CONCLUSIONS

This year’s review has been particularly pleasing, as the Asia-Pacific region in this year’s survey has achieved a ‘Holy Trinity’ of sorts i.e. greater compliance, greater number of participating funds, and a greater number of participating fund managers. The breadth and diversity of participants clearly show that the non-listed real estate fund industry has taken the new Guidelines seriously, with new participants reviewing in-depth the changes to the requirements, while recurring participants taking last year’s feedback, and incorporating the changes as appropriate into this year’s reporting.

An area where improvements could clearly be made in investor reporting is on disclosures concerning valuation. Whilst not standing out as much it had done in last year’s survey, this is still one of the key concerns for investors in the Asian developing markets due to the lack of transparency in many markets within the region and the high level of subjectivity applied to certain valuation assumptions. This is naturally a global, not an Asia specific issue, but still must be dealt with in Asia-Pacific as it must in other regions.

While it is reassuring to see these developments and this progression of fund investor reporting, we would continue to encourage all fund managers in the region to read through the Guidelines, and their feedback (for participants), and consider evolving their investor reporting where necessary.


B. NEXT STEPS

Following the launch of the 2014 INREV Guidelines, ANREV is working with INREV on refining the Guidelines, attribution between different fund styles, presented within an active web-based platform, designed to be tailored to suit all types of funds.

Given that the Guidelines are viewed as a reflection of existing best practices, feedback obtained from the region will again be taken into consideration by ANREV’s Professional Standards Committee, who will then forward feedback to INREV, along with any relevant suggestions and revisions to the Guidelines.

Going forward, we would expect that with the Memorandum of Understanding having been signed by INREV, NCREIF and PREA, co-signed by ANREV, the creation of global guidelines, would act as a further push for Asia-Pacific fund managers to meet not only regional/inter-continental best practices, but truly global ones.

This development in conjunction with the development of the Sustainability Guidelines, would assist in elevating Asia-Pacific funds to the next level in investor reporting.

On a related note, with a lot more templates and investor portals being set up, and with a poll of fund managers indicating that they, near unanimously, have to spend time filling investor data sheets, ANREV will continue to promote the increased adoption and use of the INREV Standard Delivery Data Sheet (SDDS) in the Asia-Pacific region. The SDDS standardises the main quantitative contents of the quarterly reporting data which is presented by fund managers to its investors. This is within the aim of streamlining the reporting process while providing more consistency and comparability. More information regarding SDDS can be found on the ANREV website (www.anrev.org).

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APPENDIX 1 — REVIEW FRAMEWORK AND APPROACH

Purpose of this Research

The objective of this review is to provide insights into current market practices of investor reporting across non-listed real estate funds investing in Asia-Pacific, and specifically to what extent reporting complies with the requirements and recommendations of the INREV Guidelines. In addition, as part of a wider review, we hope to continue providing region specific feedback to INREV, and new Global Guidelines working groups, with respect to their ongoing project to update the INREV Guidelines, attribute it to sectors, publish associated illustrative material, and finally to align with US trade associations to create a Global framework.

We hope that the results of this review will help ANREV support the promotion of best practices within the region, and globally, in several ways:

• WehopetogiveANREVanditsmembersinsightsintothelevelofcompliancewiththeINREV Guidelines by the industry in the region, and provide detailed feedback to each participant on how their funds compare to their peers;

• TheinformationgatheredandoutcomeoftheresearchcanbeusedasinputtoupdatetheINREV Guidelines, which are by necessity continually adapting with market needs.

• ItisintendedthattheresultswillformpartofANREV’sworktounderstandanyregionaland fund strategy variations in the adoption of the Guidelines, which were originally developed for the European market; and be combined with a similar survey being conducted in parallel within Europe to provide a cross regional comparison.


Review Approach

The review focused on if each fund’s individual array of investor reporting together complies with the relevant parts of the INREV Guidelines. Investor reporting across managers varies substantially, but typically comprises an annual report and quarterly reporting, but often also includes related investor call presentations or webcasts, other ad-hoc reporting, and sometimes additional bespoke reporting for certain investors, such as the INREV NAV. Due to the volume of reporting packages, and getting fund managers to review the requirements in detail, each participant was requested to fill in a self-assessment, including a reference to where each reporting requirement was fulfilled. Each complete set of reports, along with the self-assessment, where produced, have been analysed independently using a questionnaire tailored by PwC for this purpose, but based on the INREV gap compliance checklist which is part of the Adoption and Compliance framework of the INREV Guidelines (http://guidelines.anrev.org/). As was the case in 2014’s review, we continue to see more managers placing certain material onto real-time investor reporting or due diligence web portals, rather than including within documents to be periodically circulated. Information provided within the portals have only been treated as being compliant where we have been able to ascertain that they are used as a primary interface to report information required by the Guidelines, with the content reported to investors being updated on a periodic basis.

Results from the review of 2014/2015 investor reports have been determined based on a scoring scheme which reflects disclosures within each section of the Reporting module of the 2014 INREV Guidelines, being Fund Documentation, Content and Frequency of Reporting, General Vehicle Information and Governance, Capital Structure and Vehicle-level Returns, the Manager’s Report, the Property Report, Risk Management and the INREV NAV and fee Metrics. Such a scoring scheme was used to have a consistent methodology as the INREV review of reporting best practice in Europe.

As part of a separate analysis, we have identified certain guidelines that require the ongoing disclosure of standing information readily available to investors, and have presented additional compliance scoring having carved out these requirements. This is due to the high proportion of interviewees who do not disclose such information based on investor wishes to keep information more succinct.

The review has been performed as a quantitative research study in which the degree of adoption is determined based on scores for each of the requirements and recommendations within the Guidelines. Where possible, the review takes into account qualitative factors to help distinguish between different degrees of adoption for certain guidelines. This approach is intended to ensure a high level of consistency and fairness across the funds participating in the review, and allow comparison with the comparable survey in Europe.

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Some of the best practice requirements concern specific topics or issues which may not be relevant for all participating funds, such as joint ventures and development assets, e.g. not all funds have assets under development or hold an interest in a jointly controlled entity. Therefore, the recommended disclosure on these items were viewed as not applicable for these funds. In appraising the level of compliance, an item marked as “not applicable” has been removed from both the numerator and the denominator, equivalent to the treatment within the European survey. Due to the nature of non-compliance mainly arising from property level disclosure requirements, we noted that for the two funds we reviewed which did not take control stakes in underlying projects, a large amount of “not applicable” classifications may have impacted their overall relative rating, but this is not viewed to be significant overall to warrant splitting them out.

In the INREV Guidelines, a distinction is made between the Manager’s Report, the Property Report and the other financial Reporting disclosures. This distinction may not be made for the reports of some fund managers. Some financial reports are published in a free form in which managers’ reports are included. In such cases we have taken into consideration the various reports as a whole and checked whether the requirements of the INREV Guidelines have been detailed in the free form report.

The review was primarily carried out between June and September 2015 and comprised the following steps for each fund:

• Fundmanagersdeliveredtheirprimaryinvestorreportingdocuments,forexample,the fund’s annual report, fourth quarter report, and any other applicable documents or investor presentations to PwC;

• ThereportswerereviewedbythePwCprojectteam,whocompletedacomplianceassessment against INREV Guidelines;

• ManagershadbeenrequestedtoprepareaSelf-Assessmentifpossible.Whereprepared,the PwC assessment was compared to the Self-Assessment prepared by the fund manager;

• Fundmanagersweregivenindividualfeedbackfortheirfunds.Thiscomprisedtheirpreliminary compliance scores, but in total and against their strategy peers, and recommendations on areas of improvement for specific requirements within the revised INREV Guidelines;

• Forall28respondentfundmanagers,thePwCprojectteamheldeitheraphysicalmeeting, a conference call, or in certain instances, corresponded by e-mail to discuss the reasons for any non-compliance, and conducted a wider discussion on fair value, sustainability, how investor interaction is changing, and the realities of dealing with changing investor demands;

• Whilsttheindividualresultswereprivate,withtherespondent’spermission,adirectorfrom ANREV attended many of the interviews, to obtain active feedback from members.


Review Targeted Population and Respondents

A. Respondent Funds:

ANREV sent requests to 78 fund managers to participate in this survey, based on the ANREV member base, of which responses from 28 (2014 survey: 25) fund managers were received by PwC, with reporting covering 47 funds. It was encouraging to see that the number of both funds reviewed, and of participating fund managers has once again increased, further demonstrating the focus on investor relations, and of the wider interest and adoption of the INREV Guidelines.

The following tables show the breakdown of respondents for the 2015 study by fund style, structure and country strategy, with a comparison to 2014’s respondents.

TABLE 7 — RESPONDENTS BY FUND STYLE AND STRATEGY

2015:

Fund style/structureSingle country Multi-

countryTotal

Australia China Japan Others6

Core (open-ended) 11 0 1 1 3 16

Core (close-ended) 0 0 1 0 1 2

Value-Added (open-ended) 0 0 0 0 1 1

Value-Added (close-ended) 0 2 2 1 4 9

Opportunity (open-ended) 0 0 0 0 1 1

Opportunity (close-ended) 0 3 3 2 10 18

Total 11 5 7 4 20 47

2014:

Fund style/structure

Fund country strategy

TotalSingle country Multi- countryAustralia Japan China Others

Core (open-ended) 10 0 0 0 3 13

Core (closed-ended) 0 1 1 0 1 3

Value-added (closed-ended)

0 6 1 1 2 10

Opportunity (open-ended) 0 0 0 0 1 1

Opportunity (closed-ended)

0 0 4 1 6 11

Total 10 7 6 2 13 38

6 Other single country funds include funds investing in India and Korea.

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B. Respondent Fund Managers:

Of the participating fund managers, it was not suprising that the a significant proportion continue to manage opportunity funds. However, as shown in Chart 6, it is worth noting the style diversity of responding fund managers to both this and last year’s surveys. It is this diversity that makes the results of these surveys relevant across different styles, and not skewed by a particular group of funds/fund managers.

As demonstrated by Chart 7, there is a good degree of consistency in the population of respondent fund managers, with more than two thirds of fund managers of the 2015 survey, being recurring participants. This emphasizes the commitment most participants place to investor reporting. Furthermore, the recurring nature of most participating fund managers has allowed for a more robust analysis of the year-on-year changes in fund performance, as well as deeper discussions about the changes and challenges they encounter in their investor reporting.

CHART 6 — RESPONDING FUND MANAGERS BY FUND STYLE

FY 2015

21%

41% 38% Core

Opportunity

Value Added

FY 2014

26%

32%42%

Core

Opportunity

Value Added

CHART 7 — RESPONDING FUND MANAGERS BY PARTICIPATION HISTORY

FY 2015

31%

69%

Recurring

New

FY 2014

31%

69%

Recurring

New

Interviews were also conducted with two investors, to obtain their views on research output and the general themes coming out of our meetings or calls with fund managers. In addition to this, interviews were also conducted with three service providers, including two external valuers, a senior representative from GRESB, and one ESG consultant to get their perspective on the general themes generating from our discussion on investor reporting.


APPENDIX 2 — DETAILED COMPLIANCE RESULTS

Level of compliance by sections of the Reporting Module of the INREV Guidelines, comparatives where old Guidelines are sufficiently comparable.

INREV Guidelines Level of compliance

Total Reviewed

Reporting module FY 0%-25% 25%-50% 50%-75% 75%-100%

Sections No. of funds

%No. of funds

%No. of funds

%No. of funds

%No. of funds

%

Fund documentation for reporting framework

2015 15 32 8 17 5 11 19 40 47 100

2014 21 55 - - 3 8 14 37 38 100

Content and frequency of reporting

2015 - - 1 2 4 9 42 89 47 100

2014 - - - - 2 5 36 95 38 100

General vehicle information, organisation

and governance

2015 - - 10 21 18 39 19 40 47 100

2014 3 8 6 16 22 58 7 18 38 100

Capital structure and vehicle-level returns

2015 - - 4 9 7 15 36 76 47 100

2014 3 8 12 32 9 23 14 37 38 100

Manager’s Report2015 - - 2 4 4 9 41 87 47 100

2014 2 5 4 11 16 42 16 42 38 100

Property Report2015 3 6 2 4 14 30 28 60 47 100

2014 6 16 11 29 15 39 6 16 38 100

Risk Management2015 2 4 7 15 20 43 18 38 47 100

2014 5 13 11 29 12 32 10 26 38 100

Others disclosure requirement

2015 31 67 11 23 2 4 3 6 47 100

2014 26 68 6 16 4 11 2 5 38 100

Overall2015 - - 4 9 29 61 14 30 47 100

2014 1 3 15 39 18 47 4 11 38 100

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SPONSORING ORGANISATIONS

PwC real estate practice assists real estate investment advisers, real estate investment trusts, public and private real estate investors, corporations, and real estate management funds in developing real estate strategies; evaluating acquisitions and dispositions; and appraising and valuing real estate. Its global network of dedicated real estate professionals enables it to assemble for its clients the most qualified and appropriate team of specialists in the areas of capital markets, systems analysis and implementation, research, accounting, and tax.

Global and Regional Real Estate Contacts:

Kees HageGlobal Real Estate [email protected]

Paul WaltersAsia-Pacific Real Estate Assurance LeaderHong Kong, [email protected]

K.K. SoAsia-Pacific Real Estate Tax Leader Hong Kong, [email protected]

www.pwc.com

ANREV is the Asian Association for Investors in Non-listed Real Estate Vehicles Limited. ANREV is a not-for-profit organisation driven by institutional investors in Asian non-listed property funds. Our aim is to serve as a platform for investors who guide the association’s strategy. ANREV’s agenda is driven by its members, in particular institutional investors, and is focusedon improving transparency and accessibility through market information, professionalism and best practice. fund managers, investment banks and advisors provide support in addressing key issues facing the Asian non-listed real estate fund markets. ANREV now has 200 member companies from 17 countries.

ASIAN ASSOCIATION FOR INVESTORS IN NON-LISTED REAL ESTATE VEHICLES

LEVEL 15, NEXXUS BUILDING41 CONNAUGHT ROAD CENTRAL HONG KONGT +852 3757 9789E [email protected]

Alan DalgleishCEO [email protected]

WWW.ANREV.ORG

PwC Hong Kong Editorial Team:

Paul WaltersHannah RouthJayesh Peswani

PwC Hong Kong Research Team:

Stanley Tam, Fiona Chan, Kenny KwokSherlock Yau and Nicole Ling

ANREV Contributors:

Amélie Delaunay,Director, Research and Professional Standards, ANREV

ANREV Research Team:Henry Lam, Vivian Leung

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