Guidelines

The investment manager should ensure that the vehicle complies with applicable laws and regulations.

Vehicles must comply with applicable laws and regulations. The investment manager should comply with, and act in the spirit of, (i) the applicable laws and regulations and (ii) the constitutional documents of the vehicle. The investment manager should have appropriate systems in place to monitor compliance with them.
 

The investment manager should behave with integrity, trustworthiness and abstain from participating in unlawful transactions.

When entering into contractual arrangements, including the drafting and implementation of the constitutional documents of the vehicle, the investment manager should ensure that outcomes intended by the investors are protected. Documentation should be clear, comprehensible and not misleading.
 

The investment manager should identify and formally document its core values and principles.

The core values, principles and code of ethics of the investment manager concerning how it acts toward the vehicle should be documented and communicated to investors and stakeholders. The governing body of the vehicle should oversee adherence to these values and principles. The investment manager should promote such values and principles on an ongoing basis and establish appropriate systems to enable individuals to report unethical behaviour. These systems should be designed to ensure any whistle-blower can act anonymously and without fear of reprisal.
 

The investment manager should develop and implement a sustainable taxation policy.

An investment vehicle should follow a tax policy in relation to its structure and day-to-day transactions. The investment manager should operate an appropriate tax management framework and, together with the governing body of the vehicle, oversee the development of an effective application of tax structures, operations and compliance frameworks. Reference is made to the INREV recommendations and best practices regarding tax related matters included in Code of Tax Conduct module.
 

The investment manager should act in the best interests of both existing and new investors that have committed undrawn capital.

When making investment decisions, the investment manager should not pursue transactions which merely optimise its own outcomes, for example through enhanced management or performance fees, but should consider the best interests and reasonable expectations of both existing and committed investors.

The constitutional documents of the vehicle should also clearly state how the interests of those investors who have committed capital but whose capital is undrawn are fairly treated.
 

The investment manager should set out in the constitutional documents of the vehicle the terms by which equity (or debt investments) is issued, transferred and redeemed, to ensure fair treatment of investors.

The investment manager should clearly state in the constitutional documents of the vehicle how equity (or debt investment) is issued and redeemed. In the case of closed end vehicles, the issue of equity (or debt investment) is likely to be through one initial or multiple closings where a number of investors subscribe at the same time, with distributions occurring towards the end of the vehicle’s life, as it sells its assets and winds down. Investors may have the ability to sell their investment on the secondary market but would not normally be expected to do so. The investment manager should clearly articulate the role that it provides in respect of secondary transfers, including any fees charged or interaction with third party trading platforms or placement agents.

In the case of open end vehicles, the process of issue and redemption of equity (or debt investment) would be on a periodic basis. This may be annually, quarterly, monthly or daily. The method of valuation of the equity (or debt investment) should be clearly set out, including the underlying valuation and accounting principles applied (see G09 for open end fund pricing best practices).

Read more at inrev-guidelines">Liquidity Module.
 

The investment manager should consider the legitimate interests of other stakeholders alongside those of investors.

When establishing a new vehicle, the investment manager should identify and understand the interests of all major stakeholders with which the vehicle transacts and interacts. These interests should be reflected in the objectives and operations of the vehicle. The investment manager should regularly evaluate relevant outcomes and communicate to investors and other stakeholders as appropriate. In addition to the investors, the following parties may, amongst others, be regarded as stakeholders:

• Employees;
• Customers and tenants;
• Lenders;
• Regulators;
• Suppliers;
• The business communities in which the investment manager and investors operate.

In addition, there are other types of stakeholders related to broader and social impacts which are considered under Principle 7.
 

The governing body should scrutinise any proposed changes to the vehicle, acting in the interests of all investors.

The governing body of the vehicle has a specific duty to ensure the interests of all investors are properly considered and advise on whether any proposed changes to the vehicle structure, strategy or constitution are in the best interests of all investors. The role of independent non-executive directors is particularly relevant in this context. For instance, their analysis of the merits of any proposed changes to constitutional documents or other material transactions should be supported by any reasonable resources at the expense of the vehicle, to enable them to properly fulfil this role.

Members of the governing body of the vehicle, including any independent non-executive directors, should have (i) adequate veto and approval rights on all important governance matters, (ii) access to sufficient high-quality information to make informed decisions, (see also Principle 6), (iii) the ability to convene meetings.
 

For open end real estate vehicles, the investment manager, together with the governing body of the vehicle, should ensure effective design, operation and governance of pricing that represents the best interests of investors.

Allocating transaction costs between different vintages of investors in open end real estate vehicles and protecting existing investors against dilution is a complex matter, subject to different circumstances and events. The investment manager should adopt a set of pricing governance best practices to drive increased transparency and to ensure pricing policies are operated effectively in the interests of investors.

Read more at fund-pricing">Open end fund pricing best practice.
 

The investment manager should ensure that the vehicle, through rights established in its constitutional documents, can react in a timely and appropriate way to external circumstances and significant events.

Exceptional external circumstances and significant events within the lifecycle of a vehicle should be anticipated and considered in the vehicle’s design and constitutional documents. These include exceptional economic or environmental circumstances, which may lead to a range of situations such as valuation uncertainty and breaches of covenants or liquidity issues that may require actions such as (i) deferral or suspension of trading in the vehicle’s equity, (ii) restructuring of the vehicle or (iii) liquidation of the vehicle (see G38 on communication to investors outside of the regular reporting obligations).

Procedures relating to analysis, decision- making and consent should be adequate and clearly documented. Outcomes should enable actions to be taken on a timely basis and in the best interests of investors as a whole (see G29 and G30 on material decisions requiring specific involvement or consent of the investors).
 

The investment manager should ensure that the liability of an investor is limited to its commitment  to the vehicle. 

The investment manager should ensure that the liability of an investor does not exceed its total commitment. The constitutional documents of the vehicle should contain an explicit provision dealing with such liability.
 

The investment manager should establish and maintain an up-to-date register of related-party transactions and potential conflicts of interest and relevant mitigating circumstances.

The investment manager, in collaboration with the governing body of the vehicle, should establish a policy to manage related-party transactions and conflicts of interest. This should be adapted to the nature and scale of the vehicle. Related-party transactions and potential conflicts of interest should be documented and reported to the governing body of the vehicle and communicated to investor representative groups as appropriate.

Related-party transactions and potential conflicts of interest may arise in different circumstances, such as but not limited to:

• The investment manager (or another vehicle/party affiliated with the investment manager) competes with the vehicle;
• The investment manager (or another vehicle/party affiliated with the investment manager) buys or sells assets from/to the vehicle or co-invests with the vehicle;
• The investment manager provides a service for secondary transfers between investors;
• The investment manager establishes contracts with related entities involved in the administration and operation of the vehicle. The allocation and arm's length nature of such fees and expenses for the contracted services are a consideration;
• The investment manager seeks to sell its interest in the vehicle or there is a material change in ownership within their organisation;
• The vehicle contracts for services with third-party service providers such as valuers and auditors that are incompatible with independence considerations.

The investment manager and its affiliates should adopt a methodology that ensures that investment opportunities are fairly allocated to the vehicle.

An investment manager may advise and provide investment opportunities to a range of vehicles with different investor bases. The investment manager should establish policies and procedures to ensure that investment opportunities are fairly allocated between such vehicles. Such an allocation approach should have appropriate oversight to ensure fair outcomes and be transparent to respective groups of investors. Different allocation methodologies may be considered, such as vintage, degree of alignment with investment strategy or a pro-rata approach.
 

The investment manager should consider co-investment in vehicles in which they are active.

For certain types of investment vehicles, a co-investment by the investment manager is an appropriate way to align interests with the investors. Such co-investment could consider key management and employees as well as other concerned entities. The amount and terms of such co-investment should support a meaningful alignment of interest.
 

The investment manager should have a policy in place defining how co- investment opportunities by investors in assets held by the vehicle are treated.

If certain investors have a contractual right to co-invest alongside a vehicle in certain assets, the investment manager should have a policy in place to define how key contractual terms, such as management and performance fees, should be allocated between the vehicle and co-investment entity to ensure that the other investors in the vehicle are fairly and transparently treated.
 

The investment manager should design management and performance- related fees that are aligned with the interests of investors.

Such fees should be aligned with the interests of investors and should incentivise the investment manager to behave in a manner consistent with the risk profile of the vehicle. The remuneration and fee structure of the investment manager should not encourage the investment manager, its staff or the management board members of a vehicle to act in their in interest, or to take risks that are not in keeping with the strategy and the risk appetite that has been agreed (see G33 on fee transparency).

See the inrev-guidelines">Fee and Expense Metrics module for specific guidelines on fees and costs. 
 

The governing body of the vehicle, together with the investment manager, should ensure that they have the appropriate skills, capacity and competence to act effectively in the best interests of investors.

The investment manager, together with the governing body of the vehicle, has a responsibility to assess whether the people involved in the vehicle are of sufficiently good repute, and possess sufficient knowledge, skills and experience to perform their duties. They should also be able to act with independence of mind to effectively assess and challenge the decisions of the management body in its management function, and to effectively oversee and monitor management decision-making. They should be able to commit sufficient time to perform their functions with respect to the vehicle.

The members of the governing body of the vehicle and the employees of the investment manager should actively engage in their duties and make their own sound, objective, and appropriate decisions and judgments when performing their functions and responsibilities.

The diversity, equity, and inclusion (DEI) of employees and members of the governing body of the vehicle should be considered.

For more information about integrating social aspects of ESG into investment decision-making processes, please refer to INREV’s Sustainability Guidelines.
 

The governing body of the vehicle, supported by appropriate parties, should oversee and take responsibility for key judgments and estimates related to financial and performance reporting.

Changes in assumptions and key estimates have a significant impact on business performance and reporting. This requires setting clear expectations for transparency and quality and ensuring that the management’s judgments and estimates impacting key assumptions and the external audit processes are effective. Considerations included in the inrev-guidelines">Reporting and property-valuation#inrev-guidelines">Property Valuation modules of the INREV Guidelines should also be taken into account.
 

The investment manager should ensure that all parties involved in the operations and management of the vehicle are adequately trained and have access to appropriate educational programmes.

It is important that all parties involved in the operations and management of the vehicle have an understanding of its structure, business model, risk profile and governance arrangements, which should be facilitated through relevant training programmes. The investment manager should allocate sufficient resources for education and training to such persons.
 

Key members of the operational and management team, including the governing body of the vehicle, should have capacity and devote adequate time to effectively operate and oversee the vehicle.

This consideration is especially important for team members that are instrumental to the success and the execution of the strategy of the vehicle. The factors to take into account in this regard are, amongst others, the number of other directorships or similar management responsibilities held by such persons at the same time, and the nature and complexity of these other roles.
 

The investment manager should document and communicate the operational, management and oversight structures related to the vehicles it manages.

The operational, management and oversight structures related to investment vehicles are often complex and involve a wide range of parties performing specific tasks. The investment manager should document and communicate the structure of the vehicle framework to potential and existing investors. This should include the identification of specific roles performed by the investment advisor, management company, administrator, custodian, external auditor and valuer, amongst others. It should also identify the existence and roles of oversight and advisory bodies, such as investment committees, management boards, valuation and pricing committees, investor representative committees and audit committees, amongst others.
 

The investment manager should define an appropriate risk management framework.

This should include the definition of relevant risks and risk appetite. It should also define the roles, responsibilities and controls within the risk management function. The investment manager should ensure that the process and outcomes are aligned with the investment objectives of the vehicle, aligned with the identification of key and relevant risks and adapted to the specific needs of the vehicle. The resultant risk management framework should also be designed to operate in accordance with applicable regulations, e.g., AIFMD.

A risk management framework generally consists of implementing a policy that identifies relevant risks, establishes risk limits based on the investors’ risk appetites and expectations, gathers and analyses relevant information, and responds on a timely basis.

Risk management is a continuous process that should be monitored by the investment manager and the governing body of the vehicle. The results of this process should be reported to investors, taking account of applicable regulatory and financial reporting requirements.

See the inrev-guidelines">Reporting module for specific reporting guidelines. 
 

The investment manager, together with the governing body of the vehicle, should design and operate an effective system of internal controls.

An effective internal control framework is adapted to the specific risks, processes and organisational structure supporting an investment vehicle. It includes consideration of the operating environment of the investment manager and all relevant service providers to the vehicle. The design of an internal control environment starts with the definition of control objectives.

Based on this, effective internal controls can be designed, documented, and implemented. This should include the segregation of incompatible responsibilities and an appropriate transaction approval process that prevents an individual from acting alone or overriding internal controls. An internal control system should be tested on a recurring basis (e.g. by internal and external auditors) and the results reported to the governing body of the vehicle. Control remediation action plans to improve the environment can then be effectively directed.

The internal control framework should be aligned with legal and regulatory compliance functions and the overall risk management framework.
 

The investment manager, together with the governing body of the vehicle, should review the (vehicle) governance framework as part of any vehicle extension process.

Where the manager presents proposals for an extension of the life of the vehicle or a short run-off period to allow properties to be sold (which is not a fixed extension specified in the constitutional terms), this is in effect a new vehicle and provides an opportunity to review the constitutional terms of the vehicle.
 

The governing body of the vehicle should undertake a review of the continuing appointment or re-appointment of the external auditor, valuer, depositary and other key service providers on a regular basis.

This review should be undertaken at least every three years.

See also PV04 of the property-valuation#inrev-guidelines">Property Valuation module for guidelines on reviewing the performance of valuers.
 

The investment manager, together with the governing body of the vehicle, should evaluate the need for independent non-executive directors.

Given the wide range of investment vehicles and their features (open/closed end, number of investors, size, duration, risk profile, etc.), the need for independent non-executive directors varies across the industry.

For smaller vehicles, where investors may be closer to its day-to-day operation, the role and value of independent non-executive directors may be limited. For larger or more complex vehicles, it may be appropriate to appoint independent non-executive directors, which may form the majority of the governing body or occupy the chairperson role, to ensure decision-making always reflects the best interests of investors.

Where a vehicle appoints independent non-executive directors, the selection criteria should be clearly defined and focus on skills, qualifications, and relevant experience. Independent non-executive directors should at all times be independent of the investment manager and accountable to investors. The term of appointment of independent non-executive directors should be fixed, but for a period long enough for them to gain appropriate knowledge and to effectively execute their responsibility without losing their independence.
 

The investment manager, together with the governing body of the vehicle, should ensure that investor interests are adequately and appropriately represented.

This objective may be achieved through the constitution of various investor representative groups or committees, which generally have an advisory role in helping the investment manager and the governing body of the vehicle understand investor expectations.

Investor representative groups or committees should be able to convene meetings independently of the investment manager to enable them to exchange views or consider how to exercise their investor rights in relation to material matters.

In certain vehicles, depending on their legal structure, investors or their representative groups may need to be consulted and/or approve certain key decisions, e.g., vehicle liquidation or change of investment manager (see G30). Care should be exercised to ensure that the investors represented in these groups and committees do not gain an economic advantage over other investors.
 

Independent non-executive directors, where appointed, should act on behalf of all investors.

Independent non-executive directors, where appointed as members of the governing body of the vehicle, should represent the best interests of all investors, collectively. In this capacity, they play an important role in scrutinising and approving key matters that are subjective, complex, and material to the outcomes for investors (see also RG14 and RG15 of the inrev-guidelines">Reporting module).

For instance, particular areas of focus may include, but are not limited to:

• Ensuring communications and reporting to investors are clear, accurate, and transparent;
• Engaging with and reviewing reports from external auditors;
• Reviewing proposed changes to constitutional documents;
• Monitoring and approving any related- party transactions and conflicts of interest between investors and the investment manager;
• Ensuring a fair implementation of management and performance fee structures;
• Monitoring changes to pricing assumptions in open end vehicles;
• Overseeing the transition process when a manager’s mandate is terminated, either during or at the end of the vehicle lifecycle;
• Acting as a mediator between the investment manager and investors in certain circumstances, such as settling fee-related issues in the case of an investment manager termination;
• Monitoring the internal control framework of the vehicle (see G23) by, for example, receiving regular reports from, and having regular meetings with, the investment manager.

Read more at Reporting module.
 

The investment manager should define and communicate how certain material decisions, which include investors, are made, and how voting thresholds operate by reference to constitutional terms and local laws.

Certain material decisions (see G30), which may result in changes to the vehicle’s constitutional documents, generally require investor consent. Sufficient quantitative and qualitative information should be provided to investors to enable them to make an informed decision. Adequate time should be provided to consider this information and the proposal prior to any vote taking place.

The constitutional documents should therefore set out a practical voting process that enables the vehicle to effectively respond to circumstances.

A common approach is to require a qualified majority vote of investors. In determining which voting percentage is appropriate, consideration should be given to the individual voting power of the respective investors to establish a well- balanced voting ratio as well as any legal requirements.

The use of tacit approvals should be limited in scope and clearly described in the constitutional documents of the vehicle. If a proposed change is rejected by investors, there should be sufficient time before investors can be asked to reconsider a proposal that they have previously rejected.
 

The investment manager should identify and document any matters that require the specific involvement or consent of the investors.

The constitutional documents of the vehicle should clearly identify the process by which investors can exercise their rights, either through investor representative groups or committees, or by vote.

This enables investors to effectively propose and influence/control material changes related to the vehicle. Examples of such matters can include but are not limited to:

• Changes to the investment strategy, including allocation limits and use of leverage;
• Changes to valuation and financial reporting methodologies;
• Certain matters that relate to the resolution of conflicts of interest with related parties;
• Matters related to the appointment and operations of the investment manager, including key persons;
• Appointment of the members of the governing body of the vehicle and its external auditors;
• Liquidating or extending the life of the vehicle.
• Other material changes to the constitutional terms of the vehicle.

The governing body of the vehicle should ensure that reporting to, and communication with investors is balanced and fairly represents the activities of the vehicle.

The governing body of the vehicle has an obligation, including applicable regulatory and legal obligations, to ensure that all forms of reporting by the vehicle to its investors are appropriate in the circumstances. In pursuing this responsibility, the governing body of the vehicle should always consider the best interests of investors.
 

The investment manager should ensure the constitutional documents set out clear obligations of confidentiality assumed by the vehicle and its investors.

The investment manager is aware of information relating to the vehicle, some of which will be disclosed to investors, either through regular reporting obligations or on an ad-hoc basis. Information that is commercially sensitive to the vehicle, should be treated as confidential and investors should refrain from acting on it. The constitutional terms of the vehicle should contain appropriate undertakings to ensure confidentiality of such commercially sensitive information.

The need to maintain confidentiality should be balanced by the need to ensure transparency; if there is a conflict, the need for transparency should prevail. Confidentiality provisions should not effectively prohibit investors exercising their rights under the constitutional documents, such as when engaging third- party advisors.

An investor may also be required to share confidential information related to the vehicle with a third party. In such a case, the investor should provide a notice to such third parties that such disclosure is made in confidence and should be kept in confidence. The investor remains responsible and accountable for the compliance of the third party to whom confidential information is disclosed.
 

The investment manager should ensure the constitutional documents of the vehicle include a clear and accurate description of the management and performance fee structures.

Management and performance fee structures, whilst being a key tool to align interests, (see G16), are often based on complex mathematical formulas which are subject to interpretation. The constitutional documents of the vehicle should clearly describe in detail how such fees are calculated over time. Best practice would be to include worked examples to ensure that subjective interpretation is limited.

The investment manager should also describe in detail the services to which the fees relate. For instance, there should be a clear distinction between a management fee and other charges and activities related to the administration of the vehicle, commonly conducted by third parties.
 

Where the investment manager has the right to make certain amendments to the constitutional documents of the vehicle without investor approval or through a power of attorney, such changes should be fully communicated and disclosed to investors.

If the investment manager has the right to amend certain elements of the constitutional documents of the vehicle, it should proactively communicate to investors the purpose and the intended results of any proposed changes and provide the amended documents on a timely basis. The constitutional documents of the vehicle should clearly describe the scope of such rights. (see G29 on voting thresholds).
 

The investment manager should disclose the existence and terms of side letters entered into with investors.

There may be circumstances in which different investors will have different arrangements, financial or otherwise, with a vehicle. For example, larger investors may receive a discount on fees payable to the investment manager and have the right to be represented in investor advisory groups. The investment manager should disclose how side letters and similar individual investor agreements are negotiated and implemented. The manager should also disclose the scope and terms of such side letters from a vehicle-wide perspective.
 

Investors should provide the investment manager on a timely basis with information legitimately required by the investment manager, such as for tax compliance purposes and anti-money laundering procedures.

Investors should respond in a timely manner to legitimate requests by the investment manager or service providers related to the vehicle to enable them to comply with certain legal or regulatory requirements such as tax compliance and anti-money laundering obligations. In addition, investors should provide other legitimate, non-statutory information, such as that related to conflicts of interest that they may have with the vehicle.
 

The investment manager should clearly define the annual and interim reporting requirements towards investors in the constitutional documents of the vehicle.

In accordance with INREV’s  Reporting Guidelines, the constitutional documents of the vehicle should define the content and timing of investor reporting.

The investment manager should disclose relevant information periodically in a clear and concise manner under internationally accepted reporting standards and alongside the audited annual financial statements.

The annual report should describe the governance framework defined in the constitutional documents of the vehicle in accordance with applicable regulations (see also RG14 of the Reporting module).

The annual report should also include information such as the risk framework of the vehicle, its portfolio strategy and objectives, its sustainability strategy, and the economic outlook. It should further describe how the investment manager has complied with its business objectives and policies.

Read more at Reporting module.
 

In addition to respecting the contractual reporting obligations of the vehicle, the investment manager should provide further clear, timely and accurate information to investors and/ or key stakeholders, as relevant.

During the lifecycle of a vehicle, there may be situations or unforeseen events that the investment manager understands to be material to the outcomes of investors, which warrant timely and clear communication to investors outside of the regular reporting obligations. The investment manager, together with the governing body of the vehicle, should enable such communications to take place through appropriate channels such as written reports and/or convening meetings. The information communicated should be relevant and reliable.
 

The investment manager and the governing body of the vehicle should enable potential investors to fully utilise the INREV Due Diligence Questionnaire (DDQ) when considering an investment opportunity.

The INREV DDQ provides a consistent due diligence framework, helping potential investors achieve a high level of scrutiny when entering a vehicle. The investment manager should consider the adoption of the INREV DDQ and answer all its questions appropriately and in a clear and precise manner.
 

The investment manager, in collaboration with the governing body of the vehicle, should clearly state in the constitutional documents the vehicle’s intended level of adoption of the INREV (Vehicle) Governance Guidelines and perform an annual self-assessment of the effectiveness of its intended implementation.

To enable investors to fully understand the nature and extent of compliance of the vehicle’s intended governance framework with the INREV Guidelines, an initial as well as ongoing annual self-assessment by the governing body of the vehicle should be performed and the results disclosed appropriately.

See also RG16 and RG17 of the Reporting module.
 

The investment manager should ensure that the constitutional terms of the vehicle enable it to comply with INREV’s data collection requirements.

The investment manager should describe in the constitutional documents of the vehicle the type, frequency and purpose of information that will be provided to INREV. The investment manager should use reasonable efforts to ensure timely and accurate submission of such information and data required by INREV in the context of industry data analysis and performance measurement.

Read more at INREV Data Delivery module.
 

The investment manager, together with the governing body of the vehicle, should demonstrate how they are actively engaged with and accountable to investors.

The investment manager and the governing body of the vehicle are accountable to the investors of the vehicle as a whole. Demonstration of this accountability could include, for example, being available upon reasonable notice, defining the specific role of independent non-executive directors towards investors where applicable and meeting investors and investor representative groups to review and discuss matters relating to the vehicle.

The investment manager and the governing body of the vehicle are also expected to maintain relations with and oversee the work of external advisers and service providers, including external auditors, valuers, portfolio and property managers and risk managers. 
 

The investment manager and the governing body of the vehicle should be willing to accept a certain level of liability subject to reasonable indemnifications.

There should be a fair allocation of risk between the investment manager, the governing body of the vehicle and the investors. The extent of the liability should be in accordance with the relevant laws and regulations and described in the constitutional documents of the vehicle. At the same time, the investment manager and the governing body of the vehicle can expect to be indemnified by the vehicle for losses, except in cases of fraud and culpable behaviours such as wilful misconduct or gross negligence.
 

The investment manager should enable investors to perform compliance audits, where appropriate.

Investors should have the right, in appropriate circumstances, to request an inspection of the books and records of the vehicle or have a third-party auditor conduct an audit.

Where multiple investors acting together through investor representative groups or committees, or the governing body of the vehicle, request and agree on an independent audit, the cost should be borne by the vehicle.
 

The investment manager should ensure that the constitutional documents of the vehicle include clear provisions for the rights and obligations of all relevant parties involved in the removal of the investment manager and the early termination of the vehicle.

The constitutional documents may provide that the investors, through the governing body of the vehicle, have the right to replace the investment manager. This may occur in a range of situations which include but are not limited to key changes of control in the investment manager organisation, un-resolvable performance issues or conflicts of interest.

For cause removal: Vehicles should have a ‘removal for cause’ clause in place that gives investors, dependent on a defined threshold, the right to call at any time for a vote to remove the investment manager. The vehicle documentation should clearly describe how cause can be established. The documentation should clearly disclose the investment manager’s rights regarding management fees and reasonable expenses, including consideration of the transition period in such situations.

No fault removal: The constitutional documents of the vehicle should contain a removal at will or ‘no fault removal’ clause, whereby the manager’s mandate can be terminated due to the request of a majority or qualified majority of investors (see G29). The documentation should clearly disclose the investment manager’s rights regarding management fees and reasonable expenses, including consideration of the transition period in such situations.

Termination of the vehicle: The constitutional documents of the vehicle should provide the right for investors to terminate and dissolve the vehicle in certain circumstances. This decision is generally subject to a qualified majority vote of investors. The documentation should clearly disclose the manager’s rights regarding management fees and reasonable expenses, including consideration of the transition period in such situations.

For specific guidelines related to the wind up of a vehicle, see the inrev-guidelines">Liquidity module.
 

The investment manager, together with the governing body of the vehicle, should consider and develop a strategy to address sustainability impacts.

The investment manager should identify material sustainability aspects, including impacts and risks, and develop a sustainability strategy, with clear and measurable goals, to mitigate environmental concerns and consider social impact, as appropriate to the overall strategy of the vehicle. This may include, among others, sustainability requirements of the real estate assets the vehicle may invest in, and any additional ESG investment criteria. The investment manager should regularly report to investors on how the relevant ESG factors of the investments made have been addressed.

The investment manager should consider abstaining from making investments related to the vehicle that, on balance, are likely to adversely affect desired sustainable outcomes.
 

The investment manager, together with the governing body of the vehicle, should establish a framework which defines how the vehicle will act as a ‘responsible owner’ of real estate assets.

The investment manager should act as a responsible owner by engaging with tenants, property companies, and other stakeholders related to the vehicle and developing programmes and policies that seek to improve the social and environmental performance of the real estate assets held by the vehicle. These programmes should be aligned with the overall sustainability strategy of the vehicle, as appropriate. Considerations driving the development of such programmes could include, among others, property types and uses, and cooperation, and forms of engagement with tenants and community interests. The investment manager should clearly describe the sustainability criteria, targets, and the expected impact of such programmes.
 

The investment manager, together with the governing body of the vehicle, should implement INREV’s Guidelines on sustainability, as appropriate.

The INREV sustainability best practice recommendations aim to provide a coherent framework for sustainability reporting in line with annual financial reporting and present a clear picture from the vehicle’s strategy through environmental key performance indicators.

The investment manager should adopt INREV’s Guidelines, as appropriate, when including sustainability in a long-term strategy and translating it into objectives and annual targets for implementation.

More information on the areas to be considered will be included in the new Sustainability module (end of 2022 release).

For more information on sustainability reporting guidelines see the  Reporting module of the INREV Guidelines.
 

Club deals and joint ventures

In this section, we deal with variations in the application of the (Vehicle) Governance Guidelines to club deals and joint ventures. In practice, there can be many forms of regulated and unregulated vehicles including a range of separate accounts with single investors, club deals with a limited number of investors, and joint ventures where investors share control. In these situations, contractual arrangements, and in particular management and performance fees, tend to be very specific and customised to the circumstances and to the parties involved.
 

Control over investments

Investors participating in club deals and joint ventures are usually seeking greater control over the strategy and activities of the vehicle. They generally set more focused investment strategies and seek greater control of investment decisions. In addition to the matters set out in G30 of the Guidelines normally reserved for investors, investors are therefore likely to want to control the other matters such as the timing of acquisition and disposal of real estate assets.
 

The role of independent non-executive directors in club deals and joint ventures

In circumstances where a small number of investors are actively involved in the running of a vehicle, it would be expected that investors who participate in club deals and joint ventures would have the personnel resources to engage fully in the activities of the vehicle, without creating any management inefficiencies, such as delay in ratifying decisions. In these circumstances, the role of the independent non-executive directors may not be relevant.
 

As well as complying with general Governance guidelines, what additional factors should the Board of an investment vehicle defined as an Alternative Investment Fund (AIF) consider when appointing and monitoring a regulated Alternative Investment Fund Manager (AIFM)?

Most large real estate investment vehicles need to be managed by regulated managers or AIFMs. Although INREV’s guidelines apply equally to regulated and unregulated managers, there are additional specific considerations concerning regulated managers in order to comply with the applicable regulation. This scenario may typically occur where an AIF within the scope of the AIFMD appoints an external AIFM as its manager. In this case, there are a number of important activities which the Board of the AIF delegates to the manager, but which it must monitor in order to ensure that the AIFM is performing such tasks reasonably and in compliance with legal and regulatory requirements.

Important tasks delegated to the AIFM must include portfolio management and risk management and will often also include administration and marketing. The AIFM may also, for example, provide support to the Board of the AIF in the performance of its duties. In addition, the AIFM commonly identifies and manages key service provider relationships on behalf of the AIF, such as depositories and auditors, and under the AIFMD has a responsibility to manage the valuation of the AIF’s assets and liabilities on behalf of the AIF to which it has been appointed. Clearly, the Board of the AIF has to be comfortable with the competencies and performance of the AIFM and will normally perform a degree of due diligence on the AIFM pursuant to this goal.

There are two key elements to this due diligence role:

• Initial due diligence
• Ongoing due diligence

Both initial and ongoing due diligence should be documented.

Initial due diligence

Before appointing an AIFM, the Board of the AIF should perform initial due diligence. The initial due diligence should, among other things, assess the ability of the proposed AIFM to perform the tasks to be delegated to it, and its ability to comply with the requirements of the AIFMD.

One of the key indicators for the Board of the AIF will be authorisation and supervision by the relevant supervisory authorities. Other typical factors which the Board of the AIF may consider may include:

• Scope of activities and experience of the AIFM;
• Knowledge, skills, experience and reputation of the Board, senior management and key staff, including the portfolio manager and risk manager;
• Organisation of the AIFM, including human and technical infrastructure, and the control arrangements of the risk management, compliance and internal audit functions;
• Delegation arrangements, and ability of the AIFM to perform adequate due diligence and ongoing monitoring;
• The identity and nature of the shareholders of the AIFM;
• Values statement or code of conduct, and how they are implemented in practice;
• Segregation of risk and portfolio management functions;
• Independence of the internal/external valuer.

From a practical perspective, the AIFM could provide the Board of the AIF with part or all of its application for authorisation to the supervisory authorities, and/or its handbook describing its organisational structure, policies and procedures, to assist the Board of the AIF in its assessment of the ability of the AIFM to comply with the requirements of the AIFMD.

Ongoing due diligence

The Board of the AIF should perform ongoing due diligence to assess whether the AIFM continues to have the ability to perform the tasks which have been delegated to it and to comply with AIFMD requirements. From an ongoing compliance perspective, the AIFM should provide the Board of the AIF with one or more reports covering:

• Risk management, including, among other items, KPIs on compliance with the risk limits and the risk profile of the AIF as disclosed to investors;
• Compliance with the regulatory requirements, including in particular KPIs on the compliance of the AIF;
• Internal audit reports, providing, among other items, an evaluation on whether risk management, control, and governance systems are functioning as intended.

Typically, each of these reports would be AIF-specific. In each case, the report should also cover remedial action to correct any deficiencies identified in the current or previous reports. The Board of the AIF should receive these reports at a frequency which is appropriate to the activities of the AIF, and at least annually.

In addition, when the AIF is appointing key service providers such as auditors and depositories, or providing representations to them, and when approving reports and accounts of the AIF, they are relying on the output of many of the key functions of the AIFM. Such reliance may be formally constituted in the form of reports and representations from the AIFM to the AIF.
 

1.1 Vehicle documentation for reporting framework
 

1.2 Content and frequency of reporting

1.3 Vehicle characteristics and governance

2.1 Capital structure and vehicle-and asset-level returns
 

The sustainability reporting requirements and recommendations for ESG-related aspects are presented below.

The investment manager should disclose this information to investors in a clear and concise manner. INREV does not prescribe the structure and format of ESG reporting. This can either be disclosed in an ESG-dedicated section, embedded in other sections of annual/ interim reports, or presented as a standalone sustainability report / integrated report.

Notes:
1. Energy consumption figures include total of different energy types used, including the renewable energy sources (see the details in Appendix 1).
2. Explain the methodology used to calculate this indicator and/or to determine the components used.
3. KPIs aligned with INREV ALI ESG data fields.
4. Recommended unit of measure for data coverage is by area, investment managers may identify and report KPIs on value (AUM basis).
5. Scope 3 emissions in the INREV sustainability reporting guidelines are calculated as the emissions associated with tenant areas, unless they are already reported as Scope 1 or Scope 2 emissions. Scope 3 emissions do not include embodied carbon as it is listed separately as a recommended KPI under Appendix 1. Scope 3 emissions cover only operational activities of the portfolio of the vehicle and do not include emissions generated through the organisation’s operations or by its employees, or upstream supply chain emissions.
6. For the full list of certificates/energy rating schemes, please see INREV ALI sustainability data fields which is referenced to GRESB Asset Spreadsheet

How should a manager apply the interim and annual reporting requirements when four detailed quarterly or two semi-annual reports are provided to investors?

The INREV reporting guidelines focus on the content rather than the format of the reports to investors.
Many managers prepare three or four quarterly interim reports or one semi-annual report along with a more complete annual report, including commentary on the last quarter/half year. Although these interim reports are expected to be in an abridged form, they can also contain all the disclosures set out in the annual reporting requirements at the manager’s discretion. The reporting guidelines reflect the minimum requirements with respect to the content of the report to investors.
In some circumstances, managers provide to investors four quarterly reports or two semi-annual reports with annual financial statements provided separately. These reports contain all the disclosures set out in both the interim and annual reporting requirements and, therefore, comply with such requirements. In such case, the annual report accompanying the financial statements may only include a summary of the information provided in the detailed interim reports.

IFRS 16 requires reclassifying liabilities resulting from future lease payments of land use rights from the property value to financial liabilities. Does this change trigger a change in the computation of the INREV GAV as determined for the INREV expense ratio purposes?

The INREV GAV calculated for the INREV expense ratio purposes should be presented net of future lease payments of land use rights, similarly to what has been done prior to IFRS 16 endorsement. This will align treatment and presentation of these lease payment under INREV with current treatment and presentation by external valuers in the valuation reports.

IFRS 16 requires accounting for lease payments as interest expenses and repayment of lease obligation. Shall we include these lease payments as part of the numerator of the INREV REER?

The INREV REER should include the lease payments incurred during the reported period. The lease payments aim to indemnify the landlord for the maintenance of the building. In case the vehicle would own the building, such costs would be typically included in the REER. Nevertheless, such payments would typically have an immaterial effect on the INREV REER and on any key investment decisions.

How should acquisition costs be treated under INREV in case of merger of funds?

In case of merger of funds with substantial impact on vehicle documentation, strategy and investor base, the unamortised portion of historical acquisition costs from historical structures should be taken over and capitalised and amortised over five years along with the new setup costs arising from the merger.

How should performance fee be recognised for INREV NAV calculation purposes?

For the purposes of calculating INREV NAV, in case the performance hurdle is exceeded, at reporting date, based on the calculation methodology stated in the vehicle documentation, the performance fee should be recognised in full. Care should be taken to assess uncertainty surrounding estimates of income.

The value of the property should be its unbiased market value or fair value.

The valuation methods include, individually or a combination of, among others:

• market approach - based on market comparables;
• income approach - based on income capitalisation, discounted cash flow methodology or earnings multiple;
• cost approach - such as replacement cost less depreciation that should only be used in specific and rare circumstances when other valuation methods cannot be applied.

Valuations of property under construction should be stated at market value. Refer to INREV NAV adjustments in the INREV NAV module . The valuation of property under construction should generally be based on the fair value at completion less costs to complete (residual approach). Appropriate focus should be made on the sensitivity associated with input assumptions given the development status of the property.

However, in certain circumstances, the fair value may be determined by using the initial cost of acquisition plus subsequent construction costs. An example is during the initial phases of construction when the level of uncertainty is high. Particular care should be taken to ensure that construction and materials costs are up to date. Irrespective of local legal requirements or contractual obligations, such as vehicle regulations, the valuation methodology applied should lead to market value as defined by these guidelines.
 

The investment manager should ensure that external valuers comply with applicable laws and a recognised international professional valuation standards such as IVS, RICS and EVS.
 

All parties involved in the valuation process should strive to meet the highest professional standards of ethics and integrity.

See for more detail the inrev-guidelines">Governance module (G03) and other relevant valuation standards for ethical requirements related to the conduct of the valuer.
 

The vehicle documentation should include details of the valuation procedure along with the frequency and methodologies used to value all material assets and liabilities of the vehicle, including property.

As a key component of the vehicle’s legal framework, the investment manager should describe the underlying valuation methodologies, procedures performed, specific pricing methodologies (see inrev-guidelines"> INREV Governance module for more information) and special assumptions applied for the valuation of hard-to-value assets and liabilities, as appropriate.
 

The investment manager should design a valuation process that is aligned with the interests of investors and other stakeholders and takes account of the nature and style of the vehicle concerned.
 

The investment manager together with the governing body of the vehicle should ensure that the valuation process oversight performed by the investment manager is unbiased.

This oversight process should be independent of any potential conflicts of interest such as those arising from management or performance fee arrangements and from other services provided by related parties and associates of the external valuer and its organisation, such as brokerage.
 

The investment manager should ensure that the external valuer has a clear understanding of the context of their work and the purpose of the valuation.
 

The investment manager should ensure that the compensation of the external valuer fairly reflects the services provided and should not be directly linked to the outcome of the valuation.
 

The investment manager should ensure that the appointed external valuer is independent.

The external valuers involved in the valuation process should identify and disclose any threats to their independence or potential conflicts of interest and either manage or avoid them. See also PV11 for appropriate professional qualification requirements that set relevant rules of conduct and ethical standards.
 

In certain exceptional circumstances, the investment manager, after careful consideration by their valuation oversight function, may decide to adjust the values as determined by the external valuer to reflect their best estimates of market value in specific circumstances such as distressed situations, liquidations and wind-ups reflecting a non-going concern basis.

Such decisions should always be taken in the best interests of investors and other stakeholders and be subject to full scrutiny by the governing body of the vehicle.
 

The governing body of the vehicle, together with the investment manager and any relevant external parties, should ensure that they have the appropriate skills, market expertise, capacity and competence to estimate the market value of property in the best interests of investors.

This includes the requirement of any external valuer engaged to have the appropriate professional qualifications to perform their work, such as RICS Registered Valuer status, as well as sufficient market understanding to perform a robust valuation.
 

Given the subjective nature of property valuations and their importance to the financial framework, the governing body of the vehicle should perform effective scrutiny and actively engage with appropriate parties and make their own sound, objective and appropriate decisions when considering the determination of market value in the best interests of investors.
 

The investment manager should ensure that all parties involved in the property valuation process of the vehicle are adequately trained, familiar with the markets in scope, capable of challenging the work of the external valuer, and have access to appropriate educational programmes.
 

The investment manager, through its key members of the valuation function, and together with the governing body of the vehicle, should have the capacity and devote adequate time and resources to effectively oversee the valuation process.
 

The investment manager, together with the governing body of the vehicle, should design and operate an effective system of internal controls over a vehicle’s property valuation process.

Control objectives should include, but are not limited to:

• Ensuring that external valuers have been engaged in accordance with industry protocols;
• Ensuring that all relevant data has been provided to external valuers in a reasonable timeframe;
• Ensuring that valuation timing and frequency are consistent with the valuation policies foreseen in the management regulations;
• Ensuring that all data used in the valuation process is accurate, relevant, and up to date;
• Ensuring that the scope and methodology used to determine the market value of property reflect the legal requirements of the vehicle and applicable valuation standards;
• Understand the judgemental inputs used by the valuer in the valuation approach and the justification that they are unbiased and best reflect market circumstances. An audit trail of any subsequent discussions between the manager and the valuer and changes to the initial draft should be maintained;
• Ensuring that the scope of valuation models are adequate and that they have mathematical integrity. Valuation software can vary significantly depending on their level of automation, complexity, and exposure to manual input error risk;
• Considering appropriate back-testing when reviewing cash flow forecasts to validate reasonableness;
• Ensuring that appropriate consideration is given to the work and findings of other parties, such as internal or external auditors;
• Ensuring that significant asset-level events (eg lease termination for anchor tenants, material damage) and market events (eg exceptional circumstances impacting capital markets) are appropriately reflected in the market value when there is a timing difference between the actual date of external valuation and a later reporting date.

The governing body of the vehicle should undertake a review of the continuing appointment or re-appointment of the external valuer on a regular basis and at least once every three years.

The assessment of the external valuer firm is an ongoing process. A formal assessment should take place at least once every three years, with the objective that the external valuer firm is the best-suited valuer to perform the valuation. The results of the assessment should be reported to investors.

The assessment may result in a rotation of the external valuer firm. The assessment should also include an evaluation of whether the external valuer firm is properly insured against claims and its compliance with regulations, for example, the Alternative Investment Fund Managers Directive (AIFMD) in Europe. In the event of rotation, there should not be any affiliation between the external valuer firms.

See also G25 of the inrev-guidelines">INREV Governance module for guidelines on reviewing the performance of other service providers.

The investment manager should ensure that property valuations are performed at least once a year. The frequency of valuations should be described in the vehicle documentation and should reflect the expectations of investors and the ongoing business needs of the vehicle concerned, such as vehicle pricing considerations.

At a minimum, the scope of external property valuations should include consideration of all properties once a year. More frequent valuations may be required depending on economic circumstances or investor needs. Certain market conditions may present significant uncertainty and volatility requiring more frequent valuation updates. In addition, transactions such as the issuance or redemption of units/shares in certain vehicle types may require specific valuations.
 

The investment manager should ensure that the external valuer provides a comprehensive valuation report, in line with professional valuation standards, to enable them to adequately review and assess their work.

The external valuer should include in the valuation report key information regarding the valuation method used for each individual property type, such as investment property, property held for sale, property under construction, and ground leases. The scope of work and disclosures should be in line with the relevant valuation standards and their minimum requirements. In addition, all applicable material valuation inputs and market assumptions should be clearly communicated and explained.
 

Although external valuers may consider different valuation methodologies, the valuation should result in a single number.

There may be situations where different valuation outcomes need to be considered and resolved when determining a fair value. For instance:

• a valuer may use different methods with varying results to value a single asset;
• a single asset may be subject to multiple valuations by different valuers.

In these situations, the investment manager should determine an appropriate valuation methodology that results in a single number.
 

The fair value of properties used by the investment manager to determine the NAV of the vehicle should be aligned with the requirements of the INREV NAV module.

For instance, the allocation of transfer taxes and purchasers’ costs between a buyer and seller in different structures and market situations should be considered and appropriately reflected (see INREV NAV module).
 

The governing body of the vehicle should ensure that communication with investors is balanced and fairly represents the activities of the vehicle.

In addition to respecting contractual and reporting obligations, the investment manager should provide further clarity, and timely and accurate information to investors and/ or key stakeholders, as relevant. In pursuing this responsibility, the governing body of the vehicle should always consider the best interests of investors and confidentiality considerations. Information provided to investors should include but is not limited to:

• The valuation standards (such as RICS), methodologies, and frameworks used in arriving at an opinion of value;
• Information relevant to the approach taken across portfolios with different asset types and potentially different valuation methodologies;
• Disclosures of market assumptions and their related explanations. The information   regarding applicable market assumptions could, for example, include sensitivity analysis of rent movements and yield changes;
• Disclosure of any limitations or reservations made by the external valuer   in the valuation report;
• Disclosure and discussion of significant issues related to valuation outcomes, for example covenant breaches and related liquidity issues;
• Disclosure and explanation of deviations from the underlying appraised value, either related to vehicle-specific circumstances or disagreements with the external valuer (see PV22 and PV23);
• In the event of significant changes in market value resulting from a rotation of the external valuer, the investment manager should perform an assessment of the main underlying assumptions and provide full disclosure of the rationale for such changes.

During the lifecycle of a vehicle, the investment manager may decide to adjust the agreed-upon values as determined by the external valuer to reflect their best estimates of market value in certain exceptional circumstances related to the vehicle.

Examples of such exceptional circumstances where factual and objective information support a necessary adjustment include, among others, distressed situations, portfolio sales, liquidations, and vehicle wind-ups reflecting a   non-going concern basis of accounting. These adjustments should always be made in the best interests of investors and other stakeholders, and be subject to full scrutiny by the governing body of the vehicle. In such circumstances, timely and clear communication to investors outside of the regular reporting obligations of valuation outcomes may be required. The investment manager, together with the governing body of the vehicle, should enable such communications to take place through appropriate channels such as written reports and/or convening meetings.
 

The investment manager should ensure that appropriate internal procedures are clearly documented and can be applied in exceptional circumstances, where there may be disagreements between the investment manager and the external valuer on the underlying market value of certain individual assets. Such deviations should be fully communicated and disclosed to investors.

In such exceptional circumstances where the investment manager and the external valuer cannot reconcile their views the market value, as determined by the investment manager, should be reported to investors including full disclosure to justify the deviation from the market value arrived at by the external valuer.

Whatever the circumstances, appropriate internal procedures (including escalation and oversight measures) should be followed by the investment manager and the governing body of the vehicle in the event of valuation adjustments. These deviations and disagreements should occur very rarely and if so, more often in relation to more opportunistic investments, where, for example, the investment manager and the external valuer have different views as to the likelihood of a particular event occurring (because, for example, the investment manager is in discussion with governmental bodies, potential buyers or tenants).

Another example of deviation could relate to disagreements about value changes if there is a considerable time period between the actual date of external valuation and a later reporting date. An additional option in such circumstances is to instruct a further valuation.
 

The investment manager, together with the governing body of the vehicle, should regularly assess its level of performance in relation to its obligations towards investors and third parties, such as regulators, so far as it relates to the property valuation process, and make improvements as appropriate.
 

The investment manager and the governing body of the vehicle should be willing to accept a certain level of liability related to property valuations subject to reasonable indemnifications.

There should be a fair allocation of risk to the investment manager and the governing body of the vehicle. The extent of the liability should be in accordance with relevant laws and regulations and be described in the constitutional documents of the vehicle.

At the same time, the investment manager and the governing body of the vehicle should expect to be indemnified by the vehicle for losses, except in cases of fraud and culpable behaviours such as wilful misconduct or gross negligence.
 

The investment manager should ensure that the external valuer is willing to accept a certain level of liability related to property valuations subject to reasonable indemnifications.

The external valuer should be professionally liable and accountable for their work, in accordance with applicable regulations and the terms of their engagement.
 

The investment manager should provide or facilitate the provision of relevant and verifiable data and information to the external valuer in relation to sustainability factors that may impact valuation outcomes.

Such information and data could include, but is not limited to:

• A description of the current state and condition of the property with respect to material sustainability factors - see the inrev-guidelines">INREV Sustainability module for details regarding materiality assessment of ESG factors;
• A view of the current and future impact of sustainability regulations on the operation and ownership of the property;
• Information related to assumptions taken on current and future rentability related to sustainability factors associated with the property;
• A view on sustainability factors that have an impact on current and future operating costs assumptions (eg energy, waste disposal, water);
• A summary of sustainability considerations that are driving key capital expenditure (CapEx) assumptions in the valuation model. For instance, requirements and intentions to meet certain environmental targets to address physical and transitional climate risks, or decarbonisation pathways such as the Carbon Risk Real Estate Monitor (CRREM);
• Details of building and/or energy efficiency labels.

The investment manager should ensure that the external valuer assesses the sustainability information provided to them and its relevant elements in the input assumptions to the valuation model.

Sustainability factors should be taken into account in current valuation models based on the market evidence to support their inclusion.
 

The investment manager should ensure that the external valuer summarises and discloses how the sustainability data and information have been taken into account in their valuation process.

Information provided should take account of the investment manager’s obligations to report under various regulatory requirements (eg Sustainable Finance Disclosure Regulation (SFDR), EU Taxonomy). Further guidance on the nature of information exchange between external valuers and investment managers may be included as part of recognised valuation frameworks.
 

In following the transparency principle (PV-P05) and its related guidelines, the investment manager should, in its reporting to investors, disclose whether sustainability factors have been taken into account when arriving at valuation outcomes.

The investment manager should report to investors whether sustainability factors were deemed material during the valuation process and to what extent they were reflected in market value.

Appendix 2 illustrates a range of potential qualitative and quantitative disclosures in relation to valuation inputs that could be materially impacted by sustainability factors.

Time-weighted returns (TWR) are the preferred performance measures to use when an investment manager does not have control over the cash flows of the investment. This is typically seen in open end vehicles and non-discretionary single-client account portfolios. The Modified-Dietz Method is used to calculate TWRs throughout the financial industry.

In closed end vehicles, the investment manager has control over the drawdown of capital into the vehicle and the eventual distribution of capital and profits back to investors. Therefore, TWR may be less useful for presenting performance for such vehicles. In this context, TWR may be disclosed but it is not a required element for closed end vehicles.
 

A total vehicle level return on a time-weighted basis should be disclosed in the annual report. This measure should be provided for a one, three, five, and ten year period (where the track record exists) and since inception, on an annualised basis.

When a return for longer than or equal to one year is annualised, it is also allowed to account for the exact number of days.

Investment managers may also disclose a total vehicle level return gross of fees by using the above formulae computations and excluding fees, as appropriate.

A total vehicle level return net of fees is computed as follows:

TwdC = Time weighted (daily) contributions for the measurement period
TwdR = Time weighted (daily) redemptions for the measurement period
TwdD = Time weighted (daily) distributions for the measurement period

A total vehicle level return gross of fees is computed as follows:

TwdC = Time weighted (daily) contributions for the measurement period
TwdR = Time weighted (daily) redemptions for the measurement period
TwdD = Time weighted (daily) distributions for the measurement period

The fees to be considered are all the fees charged by the investment manager at all levels of the vehicle structure. See Fee and Expense Metrics module for the definition and description of fees typically charged to a vehicle.

When fees are charged on distributions, the investment manager should be careful at not double counting those fees into the return computation. When fees are amortised, the amortised portion should be taken into account in the vehicle return gross of fees.

See the inrev-guidelines">Fee and Expense Metrics module for specific guidelines on fees and costs. 

Annualisation is computed as follows:

where there is a return that is for longer than one year, but not a full year period (e.g., one year and two months)

For full years the formula is as follows:

AR_p = Annualised return for the measurement period p
R_p = Return for the measurement period p (non-annualised)
DHP = Number of days in the measurement period
y = number of full year periods
 

A vehicle level income return should be disclosed. This measure should be provided for a one, three, five, and ten year period (where a track record exists) and since inception, on an annualised basis.

Net investment income is a measure of the net operational income of a vehicle, on an accrual basis, comprising the income and costs described below. It is intended to provide a measure of operating activity, exclusive of capital transactions or movements in the reported period, excluding valuation gains or losses on assets and liabilities, transaction costs, sale proceeds and taxes on capital profits and losses, and other replacement costs that can be capitalised if in accordance with GAAP. Rental income is recognised in accordance with accounting standards. Certain expenses may be based on the investment vehicle’s unrealised change in net asset value, including, for example, incentive management fees, and are recognised as a component of the unrealised gain or loss.

An income return is computed as follows:

TwdR = Time weighted (daily) redemptions for the measurement period
TwdD = Time weighted (daily) distributions for the measurement period

The main components of net investment income are:

Rental and other income from direct investments and indirect investments (being the net investment income equivalent of a vehicle’s interest/holding in another vehicle):

• Rental revenue from (direct and indirect) real estate investments
• Interest income
• Distributions, dividend income
• Other income from other real estate investments

Vehicle costs:

• Audit costs
• Interest income
• Bank charges
• Custodian costs
• Dead deal costs (charged by third party)
• Transaction-based management fees
• Transfer agent costs
• Valuation costs
• Vehicle administration costs
• Vehicle formation costs (amortisation for the period)
• Debt arrangement costs
• Transaction based property service costs
• Other professional service costs
• Other/miscellaneous vehicle costs
• Financing costs

Vehicle fees:

• Asset management fees
• Fund management fees
• Wind-up fees
• Debt arrangement fees

Property costs:

• External leasing commissions
• Property insurance costs
• Property management costs
• Utilities, repair and maintenance costs
• Other/miscellaneous/sundry costs
• Acquisition fees
• Internal leasing commissions
• Property management fees

Taxation expenses:

• Corporation tax
• Income tax
• Non-resident landlord tax
• Other taxes based on gross profit
• Net wealth tax
• VAT or other sales tax (only recoverable portion)
• Withholding tax

A vehicle level capital return should be disclosed. This measure should be provided for a one, three, five, and ten year period (where a track record exists) and since inception, on an annualised basis.

When component returns (both net and gross of fees) are presented for any period, the sum of the income return and capital return will generally equal the total return. When component returns are geometrically linked to create cumulative returns, the simple addition of the cumulative income return plus the cumulative capital return will not usually equal the cumulative total return. The difference is acceptable and no adjustment is further required.

INREV’s method for dealing with this inconsistency is to calculate the returns as explained. The total return is correct and the income and capital returns are approximations.

The difference between the returns net and gross of fees do represent the time-weighted impact of fees on the returns of the vehicle.

A capital return is computed as follows:

A distributed income return should be disclosed.

Distributed income is defined as the amount of investment income derived from operations that is distributed to investors or credited to investors in the case of investment vehicle dividends or income reinvestment programs that are elected by the investor.

Distributed income does not include the return of capital or principal, the distribution of realised gains from asset sales (capital gains) or proceeds from financing activities. The objective is to present the actual cash distributions that are derived from customary and ongoing investment management operations without the distortions related to disposition and refinancing activities.

Distributions include dividends and interest paid during the period.

Distributed income return is computed as follows:

A vehicle level since inception Internal Rate of Return (SI-IRR) should be disclosed.

Inception IRR is the IRR of the vehicle after all vehicle-level fees, taxes and carried interest are deducted.

The SI-IRR represents the rate of return based on the present value of all of the appropriate cash inflows associated with an investment, with the sum of the present value of all the appropriate cash outflows accruing from it and the present value of the unrealised residual portfolio over the holding period.

SI-IRRs are commonly used to measure the performance of the investment (contrasted with TWRs, which are used to measure performance that can be indicative of investment manager performance). The SI- IRR is also known as the rate of return that results in a net present value of zero.

The SI-IRR formula discounts flows F1 through Fn back to F0 where: F0 is the original investment; and F1 through Fn are the net cash flows for each applicable period. If the entity has not yet been liquidated, the ending cash flow, Fn, will consist of the latest period’s operating cash flows plus an estimate of the net residual value.

SI-IRR at vehicle level net of fees, is computed as follows:

f₀ … f_n  = cash flow for the period 0 through n (Negative values for inflows and positive values for outflows)
IRR =  Internal Rate of return

SI-IRR at vehicle level gross of fees, is computed as follows:

where f’ is cash flow before the deduction of all the fees charged by the investment manager at all levels of the vehicle structure as detailed in the Fee and Expense Metrics module. Typically, fees are added back similarly to distributions to investors, so f’ = f + MF.

In cases where the fee is added on a date other than that of the distribution, or in cases where the fee is paid from outside the account, the same formula can be applied, in which case f’ = f + FM. In the case of accrued fees, the accrual as of time period n should be added from the final net residual market value at f’_n.

MF = Management fees (including performance fees)

Multiples

Multiples are shown as ratios, with one financial input in the numerator and another in the denominator, both of which are typically presented for the entire life of the investment rather than some discrete time period (month, quarter, etc.). Used in conjunction with time-weighted returns and IRRs, multiples provide greater transparency when analysing performance. The four commonly used multiples are presented below (PM09 - PM12).
 

A paid-in capital multiple or paid-in capital to committed capital multiple (PIC) should be disclosed.

This ratio gives information regarding how much of the total commitments have been drawn down. The paid-in capital is the cumulative drawdown amount, or the aggregate amount of committed capital actually transferred to a vehicle. Typically, a number such as 0.80 means that 80% of the vehicle’s capital commitments have been drawn from investors.

PIC is computed as follows:

PIC
CC

PIC (paid-in capital) = Cumulative capital contributed to the vehicle CC (committed capital)
Vehicle CC = Cumulative capital plus undrawn capital.
 

An investment multiple or total value to paid-in capital multiple (TVPI) should be disclosed.

The TVPI, total value to paid-in capital multiple, also known as the investment multiple, gives users information regarding the value of the investment relative to its cost basis, not taking into consideration the time invested. As an example, a multiple equal to 1.50 is typically read to mean that the investors have 1.50 units of value in the vehicle for every unit invested.

TVPI is computed as follows:

TV 
PIC

TV (Total value) = Sum of residual vehicle net assets (NAV) plus aggregate vehicle distributions
PIC (Paid in capital) = cumulative capital contributed to the vehicle
 

Realisation multiple or cumulative distributions to paid-in capital multiple (DPI) should be disclosed.

DPI represents the amount of capital and income returned or repaid to investors, divided by a vehicle’s capital calls at the valuation date. DPI reflects the realised, cash- on-cash returns generated by its investments at the valuation date. It is most prominent once the vehicle starts exiting investments, particularly towards the end of its life.

As the vehicle matures, the DPI will typically increase. When the DPI is the equivalent of one, the vehicle has broken even. Consequently, a DPI of greater than one suggests the vehicle has generated profit to the investors.

DPI is computed as follows:

 D 
PIC

D = Distributions
PIC (paid-in capital) = cumulative capital contributed to the vehicle
Distributions retained in the vehicle and not paid to the investors are considered as realised.
 

An unrealised multiple or residual value to paid-in capital multiple (RVPI) should be disclosed.

This ratio provides a measure of how much of the return is unrealised. As the vehicle matures, the RVPI will increase to a peak and then decrease as the vehicle eventually liquidates to a residual fair value of zero. At that point, the entire return of the vehicle has been distributed. Residual value is defined as the remaining equity in the vehicle or asset.

An RVPI of 0.70 would indicate that an amount equal to 70% of the vehicle’s paid-in capital remains unrealised.

RVPI is computed as follows:

RV 
PIC

RV (residual value) = Net asset value (NAV) of the vehicle
PIC (paid in capital) = cumulative capital contributed to the vehicle
 

The following items should be disclosed alongside the performance measures:

• The date to which the performance measures have been calculated;
• The currency used to express the performance measure;
• Whether fees are to be deducted to reach the net performance;
• The accounting standards applied; and
• The methodology for determining the date of cash flows.

Disclosures may also include explanations for restrictions on cash flows, such as distributions that are restricted and affected by regulations.
 

Points of reference with the same vintage year or inception year should be disclosed if available and meaningful.

Given the limited universe of vehicles in several markets, it may not be appropriate to use available main- or sub-real estate vehicle indices as points of reference. An investment manager should take reasonable care not to apply points of reference where the investment manager or vehicle in question accounts for a significant share of the underlying universe. When no appropriate point of reference exists, this must be disclosed. Where there is a difference between the performance objective and the point of reference (such as the fund style as defined by INREV), the objective may be used as a primary reference point as long as clearly disclosed.
 

Where a composite and a point of reference are disclosed, they should be described.
 

Vehicles should disclose their vintage year.
 

Where a composite is presented, a composite description must be disclosed.
 

The time period and frequency of cash flows used in the calculation should be disclosed.
 

The following considerations and methodologies are to be used when determining performance measures:

Unitised basis versus NAV basis

In some countries, the performance of vehicles may be reported at a unit level. The Guidelines have been developed on the basis that performance has been determined on an aggregate NAV and cash flow basis.

Dates of cash flows

Dates used for performance calculations should be based on the dates of cash flows between investors and the vehicle as determined for accounting purposes. As a minimum, annual cash flows should be used, but it is now common to use higher frequencies such as quarterly, monthly or daily cash flows, especially for open end vehicles. For capital calls, the deadline of the capital call should be used.

Open end vehicles are subject to potentially constant in- and out-flows of capital. To accommodate for the large flows of capital, cash flows can be rolled up periodically, ideally on a monthly basis to the end of each month.

In the case of distributions for unitised vehicles, the declared date should be used. Closed end vehicles should apply the dates where cash flows are called or distributed to investors. The date should reflect the effective date for capital calls when the capital should be paid in and for distributions when the capital was paid out by the vehicle.

Fees

Performance measures are computed net of all fees and any materialised carried interest (or any other kind of performance fee) and forecasted future (provisions for) carried interest payments.

However, fees charged to investors as a result of the redemption of units or exit of the investors should not be considered when they are earned by the investment managers rather than the vehicle. Even though not required, performance measures may also be computed gross of management fees and carried interest payments.

When fees are charged to investors outside the vehicle, performance measures should include these fees as if the fees had been billed directly to/inside the vehicle.

Composites

To illustrate the combined performance of multiple vehicles, composite performance may be presented, combining the performance of each vehicle in a standardised way over time.

Investment managers may consult other industry performance guidelines such as GIPS for further guidance on composites.

Grouping criteria

The term ‘grouping’ is used to describe the process of aggregating/disaggregating two or more vehicles to evaluate performance using the time-weighted return.

To ensure fair representation of composite performance, vehicles included in the same composite must share one or more common attributes.

Composites should be defined by common attributes. A suggested hierarchy of grouping criteria is provided below:

• Style (please refer to the INREV Style classification paper, not investment manager defined);
• Structure (open vs closed end);
• Strategy;
• Points of reference; and
• Leverage

For closed end vehicles, composite performance should preferably be defined by the combination of vintage year and one of the above-mentioned attributes.

Further considerations for multiple computations

Some vehicles have the ability to recycle capital during the investment period (to reinvest returned equity capital). For equity multiples calculation purposes, any distributions that are included as a return of equity or return on equity for the purpose of the calculation (‘nominator’) should, if reinvested (recycled), also be added to the amount of drawn capital (‘denominator’) to give a fair reflection of the true ratio of returned equity to investors. This should be the case whether the recycled equity is actually, distributed and recalled, or reinvested directly by the investment manager without physically distributing back to investors (to eliminate the back-and-forth flow of cash).
 

Asset level returns on a time-weighted basis reflect the performance of an operating asset or a group of assets. The asset level return relates strictly to asset operations and attempts to strip out all structure-related activity, usually including advisory fees, use of working capital and income and expenses. As such, asset level returns on a time-weighted basis reflect the appreciation and operating income that are generated by the asset.

Asset level returns should be reported on an unleveraged basis, as not all assets are leveraged and those that are, are leveraged within the vehicle structure, which makes the comparison of leveraged returns among different assets difficult.
 

A total return at an aggregate asset level may be disclosed.

The asset level, unleveraged return formulas are as follows:

TR = Asset total return
MV = Market value at the end of the period
D = Dispositions, net of disposal costs
A = Acquisitions, including acquisition costs
p = Period
k = Asset

Denominator (unleveraged):
When component returns are presented for any period, the sum of the income return and capital return will generally equal the total return. When component returns are geometrically linked to create cumulative returns, the simple addition of the cumulative income return plus the cumulative capital return will not usually equal the cumulative total return. The difference is acceptable, and no adjustment is required to any of the total return components.

For the estimation of an asset’s monthly market values, the following approach is proposed:
INREV's proposal

Value change adjustment:

E [MV_km] = Estimated market value at the end of the month
MV_kQ = Market value at the end of the quarter
D = Dispositions
A = Acquisitions
Q = Quarter
k = Asset
 

The asset level return should reflect the investment manager experience and not that of the investor and therefore the acquisition costs should not be capitalised or amortised for asset level return computation purposes. The acquisition costs should be expensed.

Under the fair value model, acquisition expenses for an investment property are effectively charged to income when fair value is calculated at the first subsequent measurement date after acquisition. This results in the fair value of a property on subsequent fair value measurement being lower than the total purchase price of the property.

For INREV NAV calculation purposes, the capitalisation and the amortisation of the property acquisition cost over the first five years after the acquisition of the property should be used.
 

Should the positive effect of saving on Stamp Duties as a result of a share deal sale of a property be taken into account when calculating the performance of the asset?

When determining the market value of a property, the valuer should take into account any saving on Stamp Duties and the positive effect of these savings. The valuer should make the same allowance for transaction costs that a normal purchaser of the property would make in the market, regardless of the exit strategy.
 

The valuation should be done at the asset level (valuation of the building) regardless of the SPV. The roll-up of income taxation within the SPV should be captured at the vehicle level.
 

An income return at an aggregate asset level may be disclosed.

IR = Asset income return
MV = Market value at the end of the period
A = Acquisitions
p = Period
k = Asset

Net operating income numerator (unleveraged):
The net operating income (NOI) numerator is the net operating income (before interest expenses) that was reported by the asset during the period. Vehicle or investment level income and expenses should be excluded from NOI because the asset level returns focus on asset operations.
 

When CAPEX and NOI are collected over a quarter period, to estimate the monthly values, the following two options are possible.

1.Equally distribute quarterly NOI and CAPEX to the months based on the number of days an asset is owned during the month

2. Allow contributors provide monthly NOI and CAPEX for more precise performance calculation
 

A capital return at an aggregate asset level may be disclosed.

CR = Asset capital return
MV = Market value at the end of the period
D = Dispositions
A = Acquisitions
p = Period
k = Asset

Capital return numerator (unleveraged):
The appreciation numerator measures the change in asset value (increase or decrease) not caused by capital improvements or sales.
 

The fund documentation should include details of valuation rules and procedures, pricing methodology including the methods used in valuing hard-to-value assets, and the frequency of valuation for all material assets and liabilities of the vehicle.
 

The fund documentation should disclose the frequency of the NAV calculation.
 

The INREV NAV best practice requirements for the calculation of an adjusted NAV should be used for both open end and closed end vehicles. In this section direct links will be made to IFRS as a basis for calculating the required adjustments and, if needed, to other fair value concepts. If another basis of GAAP is used, further adjustments may be required to align with IFRS as the basis for determining an INREV NAV. References to further guidance by INREV on the interpretation of fair value and provision accounting will also be included.
 

A vehicle NAV calculated in accordance with IFRS should be adjusted for the following items to calculate an INREV NAV:

Reclassification of certain IFRS liabilities as a component of the INREV NAV:

a) Effect of reclassifying shareholder loans and hybrid capital instruments (including convertible bonds) that represent shareholders’ long term interest in a vehicle

Investors’ capital can take various forms aside from equity – examples include shareholder loans and hybrid capital instruments such as convertible bonds. Some vehicles are structured via a combination of equity participations and shareholder loans.

Shareholder loans and hybrid capital instruments are generally seen as part of the investors’ overall interest in the vehicle. They should be included as a component of equity in the INREV NAV and reclassified as such if they have been classified as liabilities in the financial statements of the vehicle under IFRS. The amount to be reclassified should reflect the corresponding carrying value of the liabilities in the IFRS accounts.

The existence of such instruments as part of the capital structure of a vehicle at its origination, or investor loans that are pari-passu to their equity stake and at off-market loan terms, are indicators, among others, that these items should be reclassified as part of the INREV NAV.

The reclassification should also take account of accrued interest, which is treated in a similar fashion to dividends.

b) Effect of dividends recorded as a liability which have not been distributed

Under certain circumstances dividends are recorded as a liability but have not yet been legally distributed. For the determination of INREV NAV, these accrued dividends should be reversed to the NAV.

Fair value of assets and liabilities

c) Revaluation to fair value of investment properties

If a real estate vehicle uses the option to account for investment properties under the cost model, this adjustment represents the impact on NAV of the revaluation of the investment property to fair value under the fair value option of IAS 40.

The effect of straight-lining of lease incentives, rent guarantees, insurance claims (for damages, lost rent, etc.) should be taken into account when valuing the property at fair value in accordance with IAS 40 and SIC 15 to ensure that any asset is not double-counted in the NAV.

d) Revaluation to fair value of self-constructed or developed investment property

If a real estate vehicle uses the option to account for self-constructed or developed investment property under the cost model, the adjustment represents the impact on NAV of the revaluation of the self-constructed or developed investment property to fair value under the fair value option of IAS 40.

e) Revaluation to fair value of investment property held for sale

Some investment properties may be classified as assets held for sale or as a group of assets held for sale. The carrying value of such investment properties depends on the chosen accounting treatment under IAS 40 (either fair value or cost).

The adjustment represents the impact on NAV of the revaluation of the investment property intended for sale, measured at fair value or cost, to the net realisable value (fair value less disposal costs).

f) Revaluation to fair value of property that is leased to tenants under a finance lease

Property that is leased to tenants under a finance lease is initially measured on a net investment basis and subsequently re-measured based on an amortisation pattern reflecting a constant rate of return.

The adjustment represents the impact on NAV of the revaluation of the finance lease receivable to fair value.

g) Revaluation to fair value of real estate held as inventory

Properties intended for sale and accounted for under IAS 2 (Inventory) are measured at the lower of cost or net realisable value in the financial statements. This adjustment represents the impact on the NAV of the revaluation of such properties to net realisable value (fair value less disposal costs). This adjustment should be included under the caption ‘revaluation to fair value of real estate held as inventory’.

Where the likely disposal date is more than one year from the date of the NAV computation, disposal costs should not be deducted from fair value in calculating this adjustment.

h) Revaluation to fair value of other investments in real assets

Under IAS16 other investments in real assets are normally accounted for at cost.

The adjustment represents the impact on NAV of the revaluation of other investments in real assets to fair value in accordance with the fair value assumptions under IFRS 13.

i) Revaluation to fair value of indirect investments not consolidated

Indirect investments in real estate, such as investments in associations and joint ventures, have different accounting treatments and carrying values under IFRS. Such investments can be valued at cost, fair value or NAV.

The adjustment represents the impact on NAV of the revaluation of indirect investments to fair value if not yet accounted for at fair value.

j) Revaluation to fair value of financial assets and liabilities (including revaluation to fair value of debt obligations)

Financial assets and liabilities such as hedging instruments or debt obligations are generally measured at amortised cost, taking into account any impairment when applicable. The adjustment represents the impact on NAV of the revaluation of financial assets and financial liabilities to fair value as determined in accordance with IFRS, if not yet accounted for at fair value.

In addition, vehicles may incur costs for redemption of bank debts as a result of sales of properties. As with disposal costs, these costs are generally not accrued in IFRS. Where the property is classified as held for sale, any bank debt early redemption costs should be accrued in the NAV.

k) Revaluation to fair value of construction contracts for third parties

Under IAS11, construction contracts for third parties are normally accounted for based on the stage of completion. The adjustment represents the impact on NAV of the revaluation of construction contracts for third parties to fair value in accordance with the fair value principles of IFRS 13.

Adjustments to reflect the spreading of one-off costs

As described in further detail below, set-up costs and acquisition expenses should be capitalised and amortised. The rationale for these adjustments is to spread these costs over a defined period of time to smooth the effect of the write-off of costs on the vehicle’s performance. Furthermore, it is a simple mechanism to spread costs between different investor groups entering or leaving the vehicle’s equity at different times.

In practice, there are many other ways in which vehicles address such issues for pricing, valuation, or other purposes including using bid-ask spreads for issue premium or redemption discounts on the NAV calculated on the basis of set percentages, the capitalisation and amortisation of such costs over different time periods or, indeed, not taking into account such costs at all in the calculation of the vehicle NAV. Since the INREV NAV is primarily intended to facilitate comparability between different vehicles, the INREV approach is a simple but fixed methodology. Please note that these capitalised costs are subject to an impairment test each time the NAV is calculated and therefore should always be recoverable over time. As the adjustments with respect to set-up costs are separately disclosed in the calculation of a vehicle’s INREV NAV, investors can choose how these are taken into account when valuing their holding.

l) Set-up costs

Under IFRS, vehicle set-up costs are charged immediately to income after the inception of a vehicle.

Such costs should be capitalised and amortised over the first five years of the term of the vehicle.

The rationale for capitalising and amortising set-up costs is to better reflect the duration of the economic benefits to the vehicle.

When capitalising and amortising set-up costs, a possible impairment test should be taken into account every time the adjusted NAV is calculated when market circumstances change and it is not expected that the capitalised set-up costs can be recovered through the sale of units of a vehicle. For instance, when a decision is made to liquidate the vehicle or stakeholders no longer expect to recover the economic benefit of such capitalised expenses, they should be written down.

m) Acquisition expenses

Under the fair value model, acquisition expenses of an investment property are effectively charged to income when fair value is calculated at the first subsequent measurement date after acquisition. This results in the fair value of a property on subsequent fair value measurement being lower than the total purchase price of the property, all other things being equal.

Property acquisition expenses should be capitalised and amortised over the first five years after acquisition of the property.

The rationale for capitalising and amortising acquisition expenses is to better reflect the duration of the economic benefits to the vehicle of these costs.

When capitalising and amortising acquisition costs, a possible impairment test should be taken into account every time the adjusted NAV is calculated when market circumstances change and it is not expected that the capitalised acquisition costs can be recovered through the sale of units of a vehicle.  When a property is sold during the amortisation period or is classified as held for sale, the balance of capitalised acquisition expenses of that property should be expensed.

n) Contractual fees

A liability represents a present obligation as a result of past events. A fee payable at the end of the life of a vehicle or at any other time during the life of a vehicle may not meet the criteria for recognition as a provision or liability in accordance with IFRS at reporting date.

Examples of such fees include performance fees, disposal fees, or liquidation fees, representing a present obligation from contractual arrangements.

Most of these fees are normally accrued under IFRS accounting rules. The adjustment represents the impact on the NAV of the amount of the estimated contractual fees payable based on the current NAV of the vehicle in the rare circumstances in which these fees are not already recognised in financial statements produced under IFRS and it is probable that they will be incurred. In order to determine the amount of the adjustment, reference should be made to IFRS standards for the measurement (but not necessarily the recognition) of provisions or deferred liabilities.

A description of the calculation methodology and the terms of the underlying agreement should be disclosed (or reference could be made to the related party disclosures in which such agreements and terms are explained).

Effects of the expected manner of settlement of sales/vehicle unwinding

o) Revaluation to fair value of savings of purchaser’s costs such as transfer taxes

Transfer taxes and purchaser’s costs which would be incurred by the purchaser when acquiring a property are generally deducted when determining the fair value of investment properties under IAS 40.

The effect of an intended sale of shares in a property-owning vehicle, rather than the property itself, should be taken into account when determining the amount of the deduction of transfer taxes and purchaser’s costs, to the extent this saving is expected to accrue to the seller when the property is sold.

The adjustment therefore represents the positive impact on the NAV of the possible reduction of the transfer taxes and purchaser’s costs for the benefit of the seller based on the expected sale of shares in the property-owning vehicle.

Disclosure should be made on how the estimate of the amount the manager expects to benefit from intended disposal strategies has been made. Reference should be made to both the current structure and prevailing market conditions.

p) Revaluation to fair value of deferred taxes and tax effect of INREV NAV adjustments

Under IFRS, deferred tax assets and liabilities are measured at the nominal statutory tax rate. The manner in which the vehicle expects to realise deferred tax (for example, for investment properties through share sales rather than direct property sales) is generally not taken into consideration.

The adjustment represents the impact on the NAV of the difference between the amount determined in accordance with IFRS and the estimate of deferred tax which takes into account the expected manner of settlement (i.e., when tax structures and the intended method of disposals or settlement of assets and liabilities have been applied to reduce the actual tax liability).

Disclosures should include an overview of the tax structure including, for instance, details of the property ownership structure, key assumptions and broad parameters used for estimating deferred taxes for each country, the maximum deferred tax amount estimated assuming only asset sales (i.e., without taking into account the intended method of disposal) and the approximate tax rates used.

It is possible that the estimate of the amount of the adjustment required to bring the deferred tax liability related to property disposals to fair value could have a large impact on the INREV NAV. Since tax structures may differ from vehicle to vehicle, significant judgement is required and the mechanics of the calculation methodology for this adjustment may vary from vehicle to vehicle. Other components of the overall deferred tax adjustment require less judgement and are more mechanical in nature.

This adjustment should include a full assessment of the tax impact on NAV of INREV NAV adjustments.

As with IFRS, deferred tax balances are not discounted to take into account time value of money.

q) Effect of subsidiaries having a negative equity (non-recourse)

The NAV of a consolidated group under IFRS may include the net liability position of subsidiary undertakings. In practice, however, the group may have neither a legal nor a constructive obligation to fund the accumulated losses in situations where the financing of the subsidiaries is non-recourse to the vehicle.

In this scenario it is appropriate to make an adjustment when calculating the INREV NAV in order to recognise the group’s interest in such subsidiaries at nil or an adjusted negative amount rather than at a full net liability position, to the extent there is no intention or obligation on the vehicle to make good those losses.

The adjustment represents the positive impact on the NAV of the partial or full reversal of the negative equity of the specific subsidiary. If the vehicle has granted shareholder loans to the subsidiary, these should be taken into account.

Other adjustments

r) Goodwill

At acquisition of an entity which is determined to be a business combination, goodwill may arise as a result of a purchase price allocation exercise. Often a major component of such goodwill in property vehicles reflects the difference between the full recognition of deferred tax, purchaser’s costs or similar items in the IFRS accounts (which does not generally take account of the likely or intended method of subsequent exit), and the economic value attributed to such items in the actual purchase price. Except where such components of goodwill have already been written off in the NAV as determined under IFRS, they should be written off in the INREV NAV.

s) Non-controlling interest effects on the above adjustments

This adjustment represents the impact on the NAV of the recognition of non-controlling interests on all of the above adjustments.
 

Computation of INREV NAV per share and effect of exercise of options, convertibles and other equity interests

The INREV NAV represents the economic value of the total investment by the investors as a group. To derive the NAV per unit, managers should take into consideration any rights (such as carried interest, performance fees, manager remuneration schemes, terms or different classes of units, NAV waterfall calculation, option shares etc.) held by equity shareholders, or prospective equity stakeholders (in the case of options) of the vehicle in allocating the overall INREV NAV of the vehicle to individual classes of equity shareholders and in determining the individual value of units or shares.

In some circumstances, where the vehicle has raised and called capital, some investors may not have fully paid in their contributions. The INREV NAV per share should take into account the impact of called but unpaid capital.
 

INREV NAV disclosure requirements

Managers should make following disclosures related to the NAV computation:

• the reconciliation between GAAP NAV and INREV NAV should be presented in line with guideline NAV03

Managers should explain material estimates and computation methodologies to enable investors to understand the components of the reconciliation between GAAP NAV and INREV NAV. Explanatory notes to the reconciliation should describe key assumptions, methods used, and in particular:

• the basis for reclassifying certain shareholder loans or hybrid capital instruments as a component of equity;
• the basis for the determination of fair value of investment property, self-constructed or developed investment property, property that is leased to tenants under finance lease, investment property held for sale and real estate held as inventory;
• the basis of the estimate of other investments in real estate assets;
• the basis for the determination of the fair value of indirect investments not consolidated;
• details of the methodology used to calculate the fair value of financial assets and liabilities;
• the basis of the estimate of the fair value of construction contracts with third parties;
• the basis of the estimate of the fair value of contractual fees;
• details of the assumptions used to estimate the fair value of deferred tax and the tax effect of INREV NAV adjustments. Such disclosure gives an overview of the tax structure including, for instance, details of the property ownership structure, key assumptions and broad parameters used for estimating deferred taxes for each country, the maximum deferred tax amount estimated assuming only asset sales (i.e., without taking into account the intended method of disposal) and the approximate tax rates used;
• reasons for making adjustments to the carrying value of subsidiaries having negative equity (non-recourse);
• under IFRS, the fair value of investment properties does not take into account the expenses incurred by the seller when selling a property. As with IFRS, no adjustment is required to include a provision for such costs in the INREV Guidelines, unless they are held for sale. The manager should, however, estimate and disclose the amount of disposal costs likely to be incurred on the sale of properties, taking account of the intended method of exit, assuming an exit without duress and in the current market environment;
• set-up costs - Description of impairment and reasons for booking if applicable;
• set-up costs - Description of the reasons for departure from the five year amortisation period if applicable;
• acquisition expenses - Description of impairment and reasons for booking if applicable;
• acquisition expenses - Description of the reasons for departure from the five year amortisation period if applicable.

What is the rationale behind the adjustments in determining the INREV NAV whereby set-up costs and acquisition expenses are capitalised and amortised over five years? Do these adjustments not simply inflate the NAV of the entity given that the property portfolio is already included at its fair value in the NAV calculation?

The initial main aim of the INREV NAV is to help compare vehicle performance across a peer group and for the valuation of the investment in the units for accounting purposes at the investor level.

During the initial INREV NAV project in 2007 it was decided after several workshops, interviews and the white paper process to have one INREV NAV for both open end and closed end vehicles, with the intention of increasing comparability. It was noted that for some adjustments the suggested treatment would not necessarily lead to the correct approach for certain types of vehicle. However, when measuring performance of different types of vehicle (such as in the INREV INDEX), comparability would be increased if all vehicles treated adjustments in the same way.

The initial rationale for capitalising and amortising set-up/acquisition expenses is to better reflect the duration of economic benefit to the vehicle of these costs. This is for both performance measurement and valuation of investments.

This was prompted by the fact that, under IFRS, set-up costs are charged immediately to income after the start/inception of a vehicle and under the fair value model, acquisition expenses of investment property are effectively charged to income when fair value is calculated at the first subsequent measurement date after acquisition – resulting in the so-called J-curve.

Performance measurement

Based on the outcome of the analyses in 2007 it was INREV’s intention to use an adjusted NAV for performance measurement (including in the INREV Index) to mitigate the negative effects of the J-curve. If for performance measurement different types of vehicle, with different vintages, are compared in one index the treatment of set-up costs and acquisition expenses as a one-off expense would lead to an underperformance of that specific vehicle, in comparison with its point of reference, in the first years of the life of the vehicle (acquisition phase). For the years up to the disposal phase it would more easily outperform the point of reference, as the effects of the J-curve arising on new vehicles would lower the overall performance point of reference. During the disposal phase, a vehicle would generally underperform the point of reference as the one-off effects of the disposal costs would have a negative effect on the individual performance of the vehicle.

Valuation of units in investment vehicles

With the amortisation of set-up costs and property acquisition expenses the effect of the so-called “J-curve” can be eliminated in the valuation of units in investment vehicles. Some investors were using an adjusted NAV for valuation, others, at that time, were recording the investments at cost for the first three years and only starting to use IFRS NAV when the appreciation of real estate values had driven IFRS NAV above the initial cost price.

Furthermore, it was noted that investors were of the opinion that such expenses have a value, and were seen as part of the initial investment. These costs were directly incurred in order to receive direct returns from the rental income and hopefully indirect returns by way of value appreciation upon liquidation. This return would flow back to the investor during the whole holding period of an investment.