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INREV Guidelines
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Introduction to INREV Guidelines
INREV aims to improve the transparency of and promote best practice and professionalism in the sector. INREV members have encouraged and strongly supported the establishment of industry guidelines over the past few years and developed an integrated set of principles and recommendations including tools and examples for governance and information provision for investors and investment managers and investors of non-listed real estate vehicles. The objectives of the INREV Guidelines are:
- to ensure that investors in non-listed real estate vehicles obtain consistent, understandable, easily accessible and reliable information that can be compared across investments and between different periods;
- to establish requirements and best practices within the industry and to help investment managers implement them in practice.
The INREV Guidelines are presented in an online format, allowing visitors to easily navigate and search through and view tailored guidelines for example for open end funds.
It is possible to download a full version of the Guidelines or to create a custom version module by module in a PDF format in our Guidelines section.
The INREV Guidelines are organised into nine modules.
The Guidelines are embedded in an Adoption and Compliance Framework which allows investment managers and investors to evaluate their implementation of the INREV Guidelines, module by module. To determine ways of implementation and add a hierarchy to the guidelines’ requirements and best practices it is important to understand the underlying terminology:
Principles
Principles serve as a basis for the requirements and best practices.
Best practices
Best practices have been developed by INREV to enable investors and investment managers to design vehicle products with an effective corporate governance framework aligned with industry best practices and at the same time relevant to specific needs. Investment managers should evaluate themselves against such best practice frameworks and disclose their level of adoption.
Tools and Examples
Tools and examples are meant to assist in the application of the INREV Guidelines. Tools support market participants in assessing specific situations and in complying efficiently with INREV Guidelines and standards. Examples serve as a pattern to be followed by market participants to illustrate a certain standard.
Definitions
INREV definitions (‘Global Definitions’) were developed to achieve consistency of meaning and terminology within the non-listed real estate industry. Global definitions are being created via the collaboration with the NCREIF PREA Reporting Standards. They are gradually replacing the INREV Definitions.
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Adoption and Compliance Framework
The INREV Guidelines are designed for non-listed real estate vehicles for institutional investors. Since non-listed vehicles can differ considerably, INREV provides a modular approach to guide investors and managers in agreeing on an appropriate level of adoption of INREV best practices and in deciding on the level of compliance with INREV requirements for individual modules.
INREV’s best practice frameworks developed for the modules of corporate governance, liquidity, property valuation and tax conduct, are qualitative in nature and individual vehicles will adopt them in different ways. INREV’s objective is to ensure that investors are provided with a clear and accurate description of the corporate governance, liquidity, property valuation and tax conduct frameworks of a given non-listed vehicle. The INREV Guidelines Assessments have been developed to assess the compliance with some of these modules for managers as well as for investors. The assessment for the tax conduct module is being considered.
In contrast to best practices, INREV’s requirements in the modules covering reporting, including sustainability reporting, performance measurement, INREV NAV, fee and expense metrics and INREV data delivery, are more technical in nature. These requirements leave no room for different interpretation: the requirements are either followed, or not. In addition, in the Reporting module, Performance Measurement module and Fee and expense module, some of the INREV Guidelines are recommendations rather than requirements. Although INREV would encourage members to follow such recommendations, they are not required to be followed in order to claim full compliance with the INREV reporting module. The INREV Guidelines Assessments include questionnaires to measure compliance with the Reporting module, the Sustainability reporting module, INREV NAV module and Fees and expense metrics module. The assessment for the Performance measurement module will be added soon.
The level of compliance can be assessed with the help of the INREV Guidelines Assessments. The online assessments include all the requirements that need to be followed to be in compliance with the guidelines, as well as providing an overview of the applicable recommendations. If all of the requirements for an individual module are fully implemented, the manager can disclose full compliance with the relevant module. If the requirements of a module are not fully met, the manager should disclose that the vehicle does not fully comply with that module of the INREV Guidelines and state the reasons for deviation including any additional information relevant to investors.
In all cases, investment managers should present investors with a clear and accurate picture of the level of compliance with the INREV Guidelines. The vehicle documentation should describe, on a module by module basis, the extent to which the vehicle aims to be in compliance with INREV Guidelines.
The level of adoption and compliance with the INREV Guidelines is a matter to be discussed during the launch process of the vehicle. INREV does not provide any assurance on the degree of adoption of best practices or on the level of compliance with requirements for individual vehicles.
The legal framework applicable to individual vehicles may require third party assurance on elements of compliance with INREV Guidelines, for instance where the legal NAV of the vehicle is the INREV NAV. We recommend that investors and managers discuss and agree the nature of such assurance as part of the launch process.
The INREV adoption and compliance framework is summarised below. The framework includes references to tools which can be used to assist in the application of the guidelines.
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Best Practice Modules
COMPLIANCE OBJECTIVE |
SELF-ASSESSMENT PROCESS |
DISCLOSURE | OVERSIGHT AND ASSURANCE |
1. Corporate governance | |||
Managers should evaluate the level of adoption of INREV best practices using the Corporate Governance INREV Guidelines Assessment Tool. | Managers and investors should refer to and consider adopting INREV corporate governance best practices when designing and implementing an oversight framework for a specific vehicle. | Managers should describe in their annual report and vehicle documentation their corporate governance practices and the degree to which they adopt INREV best practices. | Management and non-executive officers should review the adequacy of the description of the corporate governance framework. |
3. Property valuation | |||
Managers should follow the valuation best practices when determining the fair value of the property portfolio and prepare required disclosures to investors. | Managers should evaluate the level of adoption of INREV property valuation best practices. | Managers should describe their property valuation policies and the degree to which they have adopted INREV valuation best practices in their annual report and vehicle documentation. | Management and non-executive officers should review the basis and adequacy of disclosure to investors summarising the level of adoption with the property valuation best practices. |
7. Liquidity | |||
Managers and investors should refer to and consider adopting INREV liquidity best practices when designing non-listed vehicle products. | Managers should evaluate, using the Liquidity Guidelines Assessment, the level of adoption of INREV liquidity best practices. | Managers should describe their liquidity policies and the degree to which they have adopted INREV best practices in their annual report and vehicle documentation. | Management and non-executive officers should review the basis and adequacy of disclosure to investors summarising the level of adoption with the liquidity best practices. |
9. Code of Tax Conduct | |||
Managers should evaluate their level of adoption of Code of Tax Conduct best practices when examining their own tax policies and practices. | Managers and investors should refer to and consider adopting Code of Tax Conduct best practices when designing and implementing an oversight framework for a specific vehicle. | Managers should describe in their annual report and vehicle documentation their practices referred to in the Code of Tax Conduct and the degree to which they adopt INREV best practices starting with reporting periods ending on or after 31 December 2021. | Management and non-executive officers should review the adequacy of the description of the Code of Tax Conduct framework. |
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Compliance Framework
COMPLIANCE OBJECTIVE |
SELF-ASSESSMENT PROCESS |
DISCLOSURE | OVERSIGHT AND ASSURANCE |
2.1 Reporting | |||
Managers should make disclosure corresponding to all relevant INREV reporting requirements and recommendations as a component of their annual or interim reports to investors. | Managers should evaluate the level of compliance with INREV requirements and recommendations, using the Reporting Guidelines Assessment. | Managers should include all information corresponding to applicable INREV reporting requirements and recommendations in their annual and interim reports. | Management and non-executive officers should review the adequacy of the compliance disclosure to investors summarising the level of compliance with reporting requirements. Auditors could give negative assurance on the degree to which INREV reporting requirements and recommendations are complied with. |
2.2 Sustainability Reporting | |||
Managers should make disclosure corresponding to all relevant INREV sustainability reporting requirements and recommendations as a component of their annual or interim reports to investors. | Managers should evaluate the level of compliance with INREV requirements and recommendations, using the Sustainability Reporting Guidelines Assessment. | Managers should include all information corresponding to applicable INREV sustainability reporting requirements and recommendations in their annual and interim reports. | Management and non-executive officers should review the adequacy of the compliance disclosure to investors summarising the level of compliance with sustainability reporting requirements. Auditors could give negative assurance on the degree to which INREV sustainability reporting requirements and recommendations are complied with. |
4. Performance Measurement | |||
Managers should disclose all relevant INREV performance measures in accordance with performance measurement requirements. | Managers should evaluate the level of compliance with INREV requirements and recommendations. | Managers should include all information corresponding to applicable INREV performance measurement requirements and recommendations in their annual and interim reports. | Management and non-executive officers should review the adequacy of the compliance disclosure to investors summarising the level of compliance with performance measurement requirements. Auditors could give negative assurance on the degree to which INREV performance measurement requirements and recommendations are complied with. |
5. INREV NAV | |||
Managers should calculate and disclose an INREV NAV in accordance with INREV requirements. | Managers should evaluate the level of compliance with INREV NAV requirements, using the INREV NAV Guidelines Assessment. | Managers should include the INREV NAV in their annual and interim reports along with required disclosures. Vehicle documentation should include the required information. | Management and non-executive officers should review the basis and adequacy of disclosure to investors summarising the level of compliance with INREV NAV requirements. Depending on circumstances, auditors can give assurance or negative assurance on the INREV NAV and level of compliance with related disclosure requirements. |
6. Fee and expense metrics | |||
Managers should calculate and disclose fee and expense metrics in accordance with fee and expense metrics requirements. | Managers should evaluate the level of compliance with INREV fee and expense metrics requirements using the INREV Fee and Expense Metrics Guidelines Assessment. | Managers should include information corresponding to INREV fee and expense metrics requirements in their annual reports and in the vehicle documentation. | Management and non-executive officers should review the basis and adequacy of disclosure to investors summarising the level of compliance with fee and expense metrics requirements. Auditors could give negative assurance on the level of compliance with fee and expense metrics requirements. |
8. INREV data delivery | |||
Managers should provide information to INREV in accordance with INREV data delivery requirements. | Managers should evaluate the level of compliance with INREV data delivery requirements. | Managers should provide INREV with all relevant information corresponding to INREV data delivery requirements. | Management and non-executive officers should review the basis and appropriateness of the compliance with INREV data delivery requirement disclosure to INREV. |
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Revision and Change Procedure
Since the launch of the revised Guidelines in April 2014, INREV received a growing number of questions and comments from members and non-members regarding the interpretation, adoption and implementation of the Guidelines. A document below describes the change procedure for updates to the INREV Guidelines.
The last major revision of the INREV Guidelines was done in 2014. Since then the following modules were updated:
Corporate Governance: AIFMD Manager's Guidance published in July 2015. Executive summary published in June 2016. Assessment tool update in December 2018
Reporting: New Q&As published in March 2020
Performance Measurement: New module launched in November 2015
INREV NAV: New Q&As published in March 2018
Fee and Expense Metrics: Update done in March 2020 to replace TER by the TGER
Liquidity: Update done in November 2018 to reflect End of Fund Life Report 2017
Code of Tax Conduct: Added in January 2021
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Tools and Examples
Example - Statement of level of adoption of INREV Guidelines
Management has assessed the degree to which the best practices of INREV’s corporate governance, property valuation, liquidity and tax conduct frameworks have been adopted and followed by the vehicle. In addition, Management has assessed the level of compliance with INREV’s reporting, sustainability reporting, performance measurement, INREV NAV and fee and expense metrics frameworks. The results of such assessment are summarised below:
MODULE | GUIDELINES | LEVEL OF ADOPTION OR COMPLIANCE |
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1 | Corporate governance | Although not described in the vehicle documentation, the INREV corporate governance module has been considered by the manager. The intended framework partially complies with the INREV corporate governance best practices. All best practices have been adopted except for the fact that investors are not able to terminate the contract of the manager without cause. The vehicle formally assessed at the end of the financial year that it is currently following its intended corporate governance framework. |
2.1 | Reporting | Although not detailed in the vehicle documentation, the INREV reporting module has been considered by the manager. The manager has complied with all the requirements of the INREV reporting module. |
2.2 | Sustainability Reporting | Although not detailed in the vehicle documentation, the INREV sustainability reporting requirements have been considered by the manager. The results of the INREV Guidelines assessment show that the manager has complied with all the requirements of the INREV sustainability reporting module. |
3 | Property valuation | As described in the vehicle documentation, the INREV property valuation framework module has been considered. The manager has defined a valuation framework which fully adopts INREV valuation best practices. The level of current compliance with the defined valuation framework was last formally assessed during the financial year when it was determined that the vehicle was in compliance with all elements of the intended valuation framework. |
4 | Performance Measurement |
The manager has disclosed all relevant INREV performance measures in accordance with the requirements of the INREV Performance Measurement module. |
5 | INREV NAV | The manager has complied with all the requirements of the INREV NAV module, except for the fact that assumptions used to determine the fair value of deferred taxes are not fully disclosed for confidentiality reasons. |
6 | Fee and expense metrics | As described in the vehicle documentation, the INREV fee and expense metrics framework module has been considered The manager has fully complied with the requirements and recommendations of the INREV fee and expense metrics module. |
7 | Liquidity | As described in the vehicle documentation, the INREV liquidity framework module has been considered. The manager has defined a liquidity framework which fully adopts INREV liquidity best practices. The manager formally assessed in at the end of the financial year that it currently follows the defined liquidity framework. |
8 | INREV data delivery |
The manager is in compliance with the INREV data delivery module. |
9 | Code of Tax Conduct | (Starting with reporting periods ending on or after 31 December 2021) Although not described in the vehicle documentation, the INREV Code of Tax Conduct module has been considered by the manager. The intended framework complies with the INREV Code of Tax Conduct best practices. All best practices have been adopted. The vehicle formally assessed at the end of the financial year that it is currently following its intended Code of Tax Conduct framework. |
As described in the vehicle documentation the results of the INREV Guidelines Assessments should be disclosed in investor reporting.
Extract from results page of the INREV Guidelines Assessments:
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Corporate Governance
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Introduction Corporate Governance
Good corporate governance is a cornerstone for the success of non-listed real estate investment vehicles and refers to the structure, processes, policies and laws that determine how an investment vehicle is managed and controlled. There are a number of different frameworks, some driven by local or EU regulation, which support this objective and there are many common themes which run through them.
For non-listed real estate investment vehicles that target institutional capital, the level of regulation can be lower than for other investment classes such as retail funds or listed structures. This is mainly due to the nature of non-listed real estate funds, which have typically low liquidity as well as entrepreneurial investment managers. In such cases, a robust corporate governance model is essential. Both INREV Guidelines and the Alternative Investment Fund Managers Directive (the “AIFMD”), which regulates fund managers in Europe, tackle the key principles that are central to a robust corporate governance approach, which:
- Aligns interests between investors and the fund manager;
- Manages conflicts of interest;
- Ensures the accountability of the fund manager; and
- Promotes transparency.
The constitutional terms of each investment vehicle, stated as fully and completely as possible, should address how principles and best practices should be applied by those involved in the management of the vehicle, thus creating binding contractual obligations for compliance by the vehicle and its investors. This module describes INREV’s best practice principles and sets out guidance on how to apply these in practice.
The INREV Guidelines focus on the vehicle itself, whereas AIFMD focuses on the manager. The INREV Corporate Governance Guidelines are principle based, expecting that people apply the principles in their behavior, whereas the AIFMD is primarily describing what the legal obligations and responsibilities of the manager are. In addition to the Guidelines the AIFMD Manager Guidance report provides a practical guide for managers who fall under the EU regulation. The report explains key functions based upon the specific governance requirements of the AIFMD and the more principle-based governance best practices of INREV.
Local and EU legislation in different jurisdictions will always override principles that do not have the force of law. INREV’s principles and best practices of corporate governance represent a generic framework and can be applied across a wide range of real estate vehicles. In order that a non-listed property vehicle or an investment manager is compliant, careful consideration should be given to both local and EU legislation applicable in the domicile of these entities.
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Executive summary
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The 7 principles of INREV Corporate Governance
- Compliance with the law;
- Compliance with constitutional terms;
- Skill, care diligence and integrity;
- Accountability;
- Transparency;
- Acting in investors interests, including alignment of interests and conflict of interests;
- Confidentiality.
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1. Compliance with the law
Compliance with the law is the foundation of every corporate governance framework. Being primarily responsible for this, the manager has to have appropriate systems in place to monitor, confirm and disclose compliance to the investors and non-executive officers. The non-executive officers should oversee the manager in all these respects, and should be able to seek external advice on these matters. The investors should make any and all necessary information available to the manager and are expected to immediately highlight any doubts they may have about the vehicle’s legal compliance.
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2. Compliance with constitutional terms
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3. Skill, care, diligence and integrity
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4. Accountability
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5. Transparency
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6. Acting in investors’ interests, including alignment of interests and conflicts of interest
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7. Confidentiality
The manager, the non-executive officers and the investors should all have access to sensitive information about the investment vehicle and its involved parties. This information must be treated according to the agreements in the constitutional terms. In general the need to maintain confidentiality has to be balanced against the need to ensure transparency and if there is a conflict, the need for transparency should prevail. However, information which, when disclosed, would create a competitive disadvantage to the vehicle, is expected to be treated as confidential and not to be disclosed widely. Confidentiality provisions should indenture all investors with the same restrictions and may not effectively prohibit investors exercising their rights under the constitutional documents.
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Principles
Compliance with the law - The investment vehicle and its manager should always comply with the relevant legislation and regulations applicable in the jurisdiction in which it is established.
Compliance with constitutional terms - The vehicle's constitutional terms should clearly articulate the key corporate governance principles which should always be applied.
Skill, care, diligence and integrity - Investors, investor representatives, non-executive officers and managers should manage the protection of investors’ interests and their investments, with due skill, care, diligence and integrity, and should ensure adequate levels of human, financial and operational resources.
Accountability - Managers, non-executive officers, investor representatives and investors, and those they have delegated to, should always be accountable for their actions.
Transparency - All relevant information relating to the vehicle should be communicated in a way which is clear, fair, complete, timely and not misleading.
Acting in investors’ interests, including alignment of interests and conflicts of interest - Vehicles should be run in the interests of all investors. Where they arise, conflicts of interest should be managed fairly between investors, vehicles and managers; the alignment of interests between investors and managers can reduce the risk of such conflicts.
Confidentiality - Information regarding vehicles and investors’ interests in vehicles which is not publicly available should always be treated confidentially.
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Guidelines
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Reporting
Describe the vehicle governance framework and the organisation of management and administration. For example, identify the AIFM, administrators, trustees, depositories, general partners, risk managers, investment advisors, portfolio managers, asset and property managers, valuers and other key functions as appropriate. Identify and discuss vehicle governance and oversight frameworks such as the use of independent directors and investor or other special committees, and how they operate. | Annual |
Interim Describe material changes |
Describe the structure and governance principles within the manager organisation (rather than vehicle) for instance on potential areas of conflict between alternative capital sources under management, conflicts management processes, Investment Committee composition and processes, alignment through promote distribution etc. | Annual |
Interim Describe material changes |
Describe the level of adoption of INREV corporate governance best practices. | Annual |
Interim Describe material changes |
Annual and interim reports should describe any material changes to the level of compliance with the corporate governance framework defined in the fund documentation. | Annual | Interim |
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Compliance with the Law
Guidelines of conduct as a manager
Vehicles must comply with all laws and regulations applicable in the jurisdiction in which they are established.
The manager should ensure that the vehicle complies with all laws and regulations.
The manager should confirm to the vehicle, the non-executive officers and investors that the vehicle is compliant with applicable laws and regulations.
The manager has primary responsibility for compliance by the vehicle with applicable laws and regulations, including AIFMD, anti-money laundering regulations and tax legislation.
The manager should have in place appropriate systems and processes to monitor compliance and should hold regular meetings with the vehicle, non-executive officers, investor representatives and, if appropriate, investors.
The manager should ensure that it has the necessary systems to monitor compliance, that the vehicle is compliant with the laws applicable in the jurisdiction in which it has been established, and that it can continue to operate without risk of breach of law. The manager should also consider the structure of the vehicle, and illustrate that it has been structured in such a way as to be tax efficient. The manager is normally expected to meet with the vehicle and non-executive officers or investor representatives, and, if the issue is sufficiently material, with investors, to brief them on relevant changes in law, including tax legislation, where these are likely to affect the vehicle.
Guidelines of conduct as a non-executive officer or investor representative
Non-executive officers or investor representatives should ensure that the manager has in place adequate systems to monitor compliance with applicable laws and regulations.
Non-executive officers or investor representatives have a role in monitoring compliance, by, for example, receiving regular reports from, and having regular meetings with, the manager. Non-executive officers may themselves incur liability in certain jurisdictions through holding their office. They should have the ability to seek separate legal advice paid for by the vehicle, if they consider this advisable or necessary. The vehicle should also provide insurance cover for non-executive officers if it is not otherwise available.
Guidelines of conduct as an investor
The investor should support the manager in ensuring that the vehicle is compliant with applicable laws and regulations.
The manager on behalf of the board of the vehicle has primary responsibility for compliance with applicable laws and regulations. Investors may be required to provide information legitimately required by the manager (such as for tax purposes) and in such circumstances should do so promptly.
Investors always need to consider carefully all information supplied by the vehicle, the manager and non-executive officers, take due note of any identified potential risks and raise questions with the manager or non-executive officers whenever appropriate, including any concerns regarding compliance, or failure to comply, with applicable laws and regulations.
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Compliance with constitutional terms
Guidelines of conduct as a manager
The manager should establish systems and processes to ensure that the constitutional terms are monitored and adhered to, and should confirm to the vehicle, non-executive officers, investor representatives and investors that the vehicle is compliant with its constitutional terms.
The contractual obligations of the manager will normally include the obligation to ensure compliance by the vehicle with its constitutional terms. These will usually be disclosed to investors and potential investors through a prospectus or information memorandum, which would include the investment strategy for the vehicle and the initial business plan.
The manager needs to be fully aware of the constitutional terms, and therefore able to confirm to the vehicle, non-executive officers, investor representatives and investors that the vehicle is compliant with its constitutional terms. The constitutional documents of the vehicle should also set out the remedies that are available to investors and others if there is a breach.
The constitutional terms should contain a clear investment policy setting well-defined restrictions and address how these principles and best practices should be applied in practice by those involved in the vehicle. They should be stated as fully and completely as possible, thus creating binding contractual obligations for compliance by the vehicle and its investors.
The manager should adopt the corporate governance best practices as a matter of policy from the outset of the vehicle. Thereafter the manager should assess the extent to which the vehicle complies with these best practices, and should report on compliance in the vehicle’s annual report or elsewhere, explaining the reasons for any departures from the best practices. Investors will then be able to form their own opinions on the corporate governance of the vehicle.
The constitutional terms should set out the role of the non-executive officer, investor representatives and investors in relation to decision-making on reserved issues.
At the inception of a vehicle investors should agree to certain key parameters of the vehicle. Any changes in or breaches of such parameters would be decisions reserved for investors such as:
- the vehicle’s constitutional terms;
- the vehicle’s investment strategy;
- the timing of the vehicle and mechanisms for termination;
- the debt restrictions for the vehicle;
- the vehicle’s liquidity mechanism;
- the removal or replacement of the manager; and
- the manager’s fee structure.
Examples of reserved matters for non-executive officers or investor representatives may include:
- annual business plan;
- resolving conflicts of interest;
- changes to the external valuer and significant changes to the valuation methodology;
- changes to the external auditor, or to accounting principles or practices, where these are likely to have a significant impact on accounting treatment;
- matters considered by the permanent risk management function;
- appointment of external advisers to represent investors on specific issues, such as those relating to risk identification and management;
- changes in key personnel including appointment of replacements;
- any circumstances where there is the risk of investor liability;
- matters of confidentiality, in cases where the nature of the investment and the relative market are particularly sensitive.
For such reserved issues, investors would expect the manager to provide them, or non-executive officers or investor representatives, with appropriate information on which to base their decision, including any professional advice. Where there is to be prior consultation between non-executive officers and investors, investors would expect such consultation and subsequent reporting to be conducted on a timely basis.
As the number of investors in a vehicle grows, so a lesser threshold for key decisions is likely to be more appropriate. Open end vehicles with established liquidity mechanisms enabling investors to exit may offer less opportunity for influence or control by investors than closed end vehicles, where the investors’ ability to exit the vehicle may be very limited.
While approval of the annual business plan may not be a matter reserved for the decision of non-executive officers or investor representatives, it is best practice for the manager to present the annual business plan to investors each year and establish a mechanism by which they can take feedback. In this way investors can make their views on the annual business plan known to the manager.
See section 2 of the Corporate Governance Assessment tool.
The constitutional terms should set out the way equity (or debt investments) is issued and redeemed in a vehicle.
The manager should clearly articulate how equity (or debt investment) is to be issued and redeemed. In the case of closed end vehicles, the issue of equity (or debt investment) is likely to be through one or more initial closings where a number of investors subscribe at the same time, with redemption being towards the end of the life of the vehicle. 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 even daily. The method of valuation of the equity (or debt investment) should be clearly set out, including the underlying valuation and accounting principles applied. In some jurisdictions and vehicle structures, the mechanism is prescribed by legislation or government regulations.
Vehicle extensions provide an opportunity for the manager to review the corporate governance with investors.
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.
Guidelines of conduct as a non-executive officer or investor representative
Non-executive officers or investor representatives should ensure that the manager has in place adequate systems to monitor the extent of compliance with the vehicle’s constitutional terms.
Since the manager is obliged to ensure that the vehicle complies with its constitutional terms, the role of the non-executive officer or investor representative is to monitor compliance through receiving reports and having regular meetings with the manager. The non-executive officer or investor representative should have the ability to engage advisors (at the cost of the vehicle) to assist with legal or technical matters.
In circumstances where the termination of the manager’s mandate is activated, the non-executive officers or investor representatives should oversee the process to ensure stability during the transitional period.
Non-executive officers (where independent of investors) are expected to act as mediators between investors and managers and to review with investors the consequences and costs associated with the process of manager change.
Guidelines of conduct as an investor
Investors should fully understand the constitutional terms before investing. Acceptance of the constitutional terms is demonstrated by signing the subscription agreement.
In order to allow an investor to fully understand the investment, the constitutional terms should state the vehicle strategy and vehicle operation, the relationship and obligations between investors and the vehicle (including investor decisions, meetings and votes), and the liquidity opportunities for investors, including the eventual exit procedures upon winding-up, if appropriate. Investors are expected to comply with these obligations. The constitutional terms should be clear and unambiguous, and include the appropriate jurisdiction in which meetings to decide on important issues which are reserved to investors are to be held.
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Skill, care, diligence and integrity
Guidelines of conduct as a manager
The manager should implement a code of ethics to demonstrate integrity.
The manager operates under a duty of care to the vehicle which has appointed it, and, through the vehicle, to investors. Investors, when deciding to invest, have usually relied upon the manager’s track record, and its acknowledged standing, integrity and reputation. The manager needs to be able to satisfy both the vehicle and investors that it has performed its duties with the required degree of integrity, and that it has behaved ethically in its dealings with the vehicle, non-executive officers, investor representatives, the vehicle’s external advisers and investors.
The manager should exercise the necessary control over its staff, external advisers and third party service providers to ensure that it can operate in the best interests of the vehicle and its investors.
The manager has to demonstrate to investors that it has the required skill to meet its obligations as a manager. This may include using third party service providers. See section 3 of the Corporate Governance Assessment tool. The manager is expected to have the required level and quality of expertise in terms of staffing, external advisers and third party service providers, as well as the necessary resources, in particular:
- adequate number of properly trained staff with the required level of experience, qualifications and skills;
- access to competent external advisers and expert service providers in the relevant jurisdictions, each of whom has an adequate system of internal controls and reports regularly to the manager on the effectiveness of such a control framework.
The manager should follow INREV guidance.
The manager, in order to show that it has acted and is acting diligently, both upon the establishment of the vehicle and during its life, is expected to be able to demonstrate to investors that it conducted the necessary due diligence (in line with the INREV due diligence protocol) upon the establishment of the vehicle, and that the vehicle is legally able to adopt its strategy to achieve its anticipated returns.
The manager should implement an agreed policy on risk identification and management for the vehicle, and establish and maintain a permanent risk management function.
The manager should identify risks early and manage them in a timely and proper manner. The manager needs to be able to show that potential risks are identified, monitored and managed quickly and diligently. This can only be achieved if the manager has competent staff, external advisers and service providers with the requisite expertise. The manager should also implement an adequate system of internal controls and ensure that information on the effectiveness of such a control framework is provided regularly to investors. See section 3 of the Corporate Governance Assessment tool.
Guidelines of conduct as a non-executive officer
Non-executive officers should have the appropriate level of skill, training and access to external advisers and service providers to ensure that the interests of investors are protected.
Non-executive officers should be appropriately trained so as to be up-to-date on relevant issues, and to have access to the vehicle’s external advisers and service providers. In particular, non-executive officers need to have the opportunity to discuss with the vehicle’s external valuers matters regarding property valuations.
Non-executive officers should ensure the monitoring of internal controls, risk management and reporting.
Non-executive officers should satisfy themselves that the manager has in place secure systems which monitor the vehicle's activities, that adequate internal controls are established by the manager to identify and manage risks on a timely basis and in a proper manner, and that the manager complies with its reporting obligations in a regular and timely manner.
Non-executive officers should have regular meetings with the manager and other external advisers and service providers, and with investors (if appropriate, with the manager absent), when considered necessary.
Non-executive officers are expected to attend meetings with the manager, other external advisers and service providers, and with investors when circumstances require, and to refer to investors’ matters of concern. See section 3 of the Corporate Governance Assessment tool. They may also need to call upon independent professional advice. To ensure that non-executive officers are able to act free from influence by vehicles or managers, it is necessary that they have the opportunity to discuss freely and openly with investors (without the manager being present) matters of a particularly sensitive nature.
Guidelines of conduct as an investor
Investors should employ staff or other resources with the requisite market experience, skills, expertise and knowledge.
Investors need to ensure that they and their representatives have had the appropriate training and are up-to-date with relevant developments, so as to be in a position to seek the appropriate information from the vehicle or the manager in understanding the performance and development of the vehicle. Investors should act diligently when requested to consent to proposals made by the manager, and should respond in a timely and proper manner.
The constitutional terms of the vehicle should contain provisions dealing with circumstances in which investors fail to meet their obligations to the vehicle. See section 3 of the Corporate Governance Assessment tool.
Investors should act diligently to assess and monitor the identification and management of risks.
Investors should obtain from the manager, before investing, information they consider necessary to satisfy themselves that the vehicle strategy is appropriate, that the risks are appropriate relative to the rewards, and that the manager has the requisite experience and resources (human, financial and information) to be able to deliver the expected returns. INREV has published a recommended questionnaire for investment evaluation to assist investors in their due diligence investigations.
Investors should regularly review the performance of non-executive officers, and should periodically ratify their reappointment.
Investors will need to be satisfied that non-executive officers are properly performing their role to protect the interests of investors and so should assess their performance annually.
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Accountability
The manager should demonstrate how it is accountable to investors.
The manager is accountable to the vehicle and the investors as a whole. Investors will rely on the manager to ensure that the objectives established at the outset and investment plans are achieved and that the vehicle operates in accordance with its constitutional terms and all applicable laws and regulations. The manager can demonstrate this accountability, for example, by being available, upon reasonable notice, to meet with non-executive officers, investor representatives and investors to review and discuss matters relating to the vehicle. The manager would also normally be expected to exercise control over, and maintain close relations with, the external advisers and service providers, including external auditors, valuers, portfolio and property managers and risk managers.
The manager should be indemnified by the vehicle, except where the manager is negligent.
The manager should be willing to accept a certain level of liability for its actions but would generally expect to be indemnified by the vehicle for losses where the manager has not been negligent or in breach. See section 4 of the Corporate Governance Assessment tool.
The manager should be able to be terminated with or without cause.
The ability of the investors to terminate the contract of the manager, both for cause and without cause, is an indication of the extent to which the manager is accountable. Greatest accountability is achieved with a no-fault termination mechanism, after a special resolution of investors. Reasonable compensation may be due to the manager depending on the circumstances of the termination. See section 4 of the Corporate Governance Assessment tool.
Investors will expect protection against circumstances where the performance of the manager (whether measured quantitatively or qualitatively) is sub-standard. In such circumstances it may be appropriate to establish a process of dialogue with a timetable between the manager and the investors (through the non-executive officers or investor representatives) to address such underperformance. In circumstances where the plan agreed from such a process is not followed by the manager then the investors may consider suspension of the investment period or even termination of the manager after a special resolution.
Guidelines of conduct as a non-executive officer or investor representative
Non-executive officers and investor representatives should be accountable to investors.
Non-executive officers and investor representatives are accountable to investors in their role as monitors of the performance and compliance of the vehicle. This may be by participation on a non-executive board or advisory committee. Such accountability should, however, not be coupled with liability to other investors other than in the case of wilful misconduct or bad faith on the part of the non-executive officer or investor representative.
See section 4 of the Corporate Governance Assessment tool.
Guidelines of conduct as an investor
Investors should ensure that the manager and, where appropriate, non-executive officers are held accountable for the performance of the vehicle.
Investors are accountable to their own relevant bodies, but not to the vehicle, non-executive officers or the manager. They are, however, responsible for holding the manager and non-executive officers accountable. For example, they are expected to attend relevant investor meetings and consider carefully and diligently all information and reports supplied by non-executive officers, the manager and external advisers. They are expected to conduct themselves in such a way as not to be open to criticism that they have acted in an unethical manner.
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Transparency
The manager should make available to the vehicle, non-executive officers, investor representatives and investors, in a timely manner, all relevant information and reports.
During the life of a vehicle the manager provides information (including reports) relevant to the vehicle, in order to enable investors to understand the performance of the vehicle and its compliance with the vehicle strategy, and to be satisfied that it meets the objectives established in the business plan. See section 5 of the Corporate Governance Assessment tool. Investors and non-executive officers need to be in a position to, for example:
- assess the performance of the vehicle against given targets, such as industry peer groups;
- understand the progress compared to the business plan and forecasts;
- understand the risks in a vehicle and how they are being managed;
- satisfy themselves as to compliance with the vehicle's constitutional terms and applicable laws and regulations without imposing any obligation on investors themselves to monitor compliance);
- understand the extent and nature of investments and divestments and the consequent funding of transactions;
- understand the fees payable to the manager and the vehicle expenses charged directly.
The manager should respond in a timely and transparent manner to all reasonable questions and enquiries raised by non-executive officers, investor representatives and investors. Material events, such as a change in key personnel, should be reported to investors immediately.
The manager should have regard to INREV Guidelines on property valuations.
During the life of the vehicle the manager will provide investors, investor representatives and non-executive officers with property valuations. Investors would expect external property valuers to be independent. In order to ensure that valuations are adequately monitored, and that the interests of investors are protected, the rotation of external valuers upon the expiry of their mandates is encouraged, and the fees paid to external valuers should be structured in such a way as not to compromise the independence of valuations. See section 5 of the Corporate Governance Assessment tool.
The manager should report to investors on the extent of compliance with INREV corporate governance principles and guidelines including any circumstances in which best practice is not followed and the explanation as to why this is so.
The constitutional terms of a vehicle should set out the use of side letters, which should be disclosed to all investors.
We recognise that there may be circumstances in which different investors will have different arrangements with a vehicle. For example, larger investors may receive a discount on fees payable to the manager. The manager should set out how side letters and similar individual investor agreements will be dealt with. The manager should disclose the terms of such side letters, while recognising that certain investors may request anonymity in such matters. See section 5 of the Corporate Governance Assessment tool.
AIFMD specific requirement: In case of an externally managed AIF, the AIFM is responsible for compliance with the transparency requirements of the AIFMD.
Guidelines of conduct as a non-executive officer or investor representative
Non-executive officers or investor representatives should be satisfied that procedures are in place to ensure that investors are in receipt of information prepared by the manager.
Throughout the life of the vehicle, the manager is under an obligation to ensure that all relevant information and reports are made available to investors, investor representatives and non-executive officers, in a timely, proper and comprehensive manner, so as to inform investors, investor representatives and non-executive officers on matters such as strategy, achievement of targets and the progress and performance of the vehicle. Non-executive officers and investor representatives have a role in seeing that the manager meets these obligations.
Guidelines of conduct as an investor
Investors should feed back to the manager their precise information requirements, and whether they are being satisfied by the vehicle.
This should help ensure that the vehicle's reporting is managed as efficiently as possible.
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Acting in investors' interests, including alignment of interests and conflict of interests
The manager should demonstrate that its interests are truly aligned with those of investors through vehicle structures.
The vehicle is established to deliver investment performance to investors. The manager is expected to act in the interests of investors. As far as possible, this can be assured by creating structures in the vehicle to ensure the alignment of the manager’s interests with those of the investors.
Alignment of interest may be achieved by the manager investing a meaningful amount in the vehicle. See section 6 of the Corporate Governance Assessment tool. INREV recognises that there may be circumstances in which co-investment by the manager may not be appropriate, however.
Alignment of interest may also be achieved through the fee structure, including payment of performance fees to the manager based on vehicle performance. This may not fully align the manager to downside risks, however. Any performance fee structure should incentivise the manager to behave in a manner consistent with the risk profile of the vehicle and should reflect the added value that the manager is expected to provide. For example, the element of manager remuneration related to performance is typically less for a core vehicle than for an opportunistic vehicle. See section 6 of the Corporate Governance Assessment tool.
Remuneration policies are required for those employees of the manager whose professional activities have a material impact on the investment strategy or the risk profile of the vehicle they manage. The remuneration policies should promote sound and effective risk management and not encourage risk-taking which is inconsistent with the risk profile of the vehicle.
The constitutional terms should set out the provisions to be applied in the event that key personnel leave the manager.
Where certain employees of the manager have been identified in the documentation as key men or personnel, the constitutional terms will often contain specific provisions to cover the situation where these personnel leave the manager. The provisions may extend to the manager being prohibited from making further investments, or even face losing its mandate. See section 6 of the Corporate Governance Assessment tool.
The manager and the vehicle should implement a written protocol documenting how to handle conflicts of interest within the vehicle.
Conflicts of interest between the manager and the vehicle may arise in a number of circumstances, such as where:
- the manager (or another vehicle controlled by the manager, or a related party to the manager) competes with the vehicle to acquire assets;
- the manager (or another vehicle managed by the manager, or a related party to the manager) buys or sells assets from the vehicle;
- changes are proposed to the fee structure or other arrangements between the manager and the vehicle;
- the manager seeks to sell its interest in the vehicle;
- investors are in conflict over a decision that is required to be made by them.
Conflicts of interest may also arise with third party service providers. For example, the external valuer may make an offer to provide additional property services to a vehicle. This could potentially compromise the independence of its valuations.
When potential conflicts of interest arise, the manager should bring them immediately to the attention of the vehicle and the non-executive officers or investor representatives, and implement the agreed conflict procedure. The manager should always ensure that dealings in related-party transactions are on an arm’s-length terms basis. For example, if the manager (or another vehicle managed by the manager) wants to compete with the vehicle to acquire assets, the manager should disclose this to the vehicle, together with a policy for ensuring fair treatment for all its clients. See section 6 of the Corporate Governance Assessment tool.
The vehicle should set out how all investors will be treated on new issues, redemptions and transfers of equity (or debt investments) in the vehicle.
Conflicts of interest can arise whenever investors vary their holdings in a vehicle. The manager should ensure that the rules governing new issues, redemptions and transfers are clearly and transparently set out for all investors. Such rules should be in accordance with guidance provided in the INREV liquidity guidelines and should be fairly and consistently applied. Conflicts of interest can also arise for the manager in providing a service for secondary transfers between investors, and its role in raising new capital, if applicable. At the outset the 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.
Guidelines of conduct as a non-executive officer or investor representative
Non-executive officers or investor representatives should ensure that the manager demonstrates that its interests are aligned with investors’ interests.
During the life of the vehicle, the role of the non-executive officer or the investor representative is to protect investors’ interests. One way in which the non-executive officer or investor representative can do this is by ensuring that the manager’s interests are aligned with those of the investors.
Non-executive officers should ensure that the manager has a written protocol documenting how conflicts of interest should be managed.
If conflicts are identified, non-executive officers should ensure that the manager implements the agreed conflict procedure. Non-executive officers may have to make decisions on behalf of the vehicle if the manager is conflicted. If non-executive officers are not satisfied that a conflict has been fairly and properly resolved, they would be expected to refer the matter to investors. Non-executive officers are expected to be actively involved in overseeing transactions between the manager and the vehicle, such as changes in the fee structure, and to be satisfied that the terms of such transactions are at arm’s length and are reported to investors.
Guidelines of conduct as an investor
The vehicle should be run in the interests of investors to deliver anticipated returns.
Investors should advise the vehicle and non-executive officers in a timely manner if they consider that the vehicle is not being run in their best interests.
Investors should disclose conflicts of interests to other participants in the vehicle and act appropriately.
Conflicts of interest between an investor and the vehicle may arise in a number of circumstances, such as where an investor competes with the vehicle to acquire assets or an investor buys assets from, or sells assets to, the vehicle. Investors need to act with integrity, and to disclose appropriate information to the particular vehicle, the manager and other investors, in a timely and proper manner. For example, if an investor competes with the vehicle, or buys an asset from, or sells an asset to, the vehicle, the investor would normally excuse itself from the relevant discussions in the vehicle or from receiving any information. In such circumstances, an investor may have to create ‘Chinese Walls’ so that different individuals or teams of people are able to act for the different parties.
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Confidentiality
The constitutional terms should set out the obligations of confidentiality assumed by the vehicle and its investors.
The manager will be aware of information relating to the vehicle, some of which may become publicly available, and some of which may be disclosed in order to be transparent. Information which is commercially sensitive to the vehicle, however, is expected to be treated as confidential and not to be disclosed widely. The constitutional terms may contain confidentiality undertakings, so that the vehicle passes on to its investors the duty to keep certain information confidential, and to refrain from acting on it.
The need to maintain confidentiality has to be balanced by the need to ensure transparency; if there is a conflict, the need for transparency should prevail. The constitutional terms should set out the rights of non-investors, such as potential investors and their advisors, to receive information without entering into a confidentiality agreement. Confidentiality provisions should not effectively prohibit investors exercising their rights under the constitutional documents, such as when engaging third party advisors. See section 7 of the Corporate Governance Assessment tool.
Guidelines of conduct as a non-executive officer or investor representative
Non-executive officers and investor representatives should comply with confidentiality provisions in the constitutional documents.
Non-executive officers or investor representatives may be aware of confidential information relating to the vehicle, which is neither publicly available nor known to investors. If non-executive officers or investor representatives have received information relating to the vehicle which is commercially sensitive, they should observe the confidentiality provisions contained in its constitutional terms. If appropriate, non-executive officers should assist the manager in the disclosure of the information to investors.
Guidelines of conduct as an investor
Investors should comply with the confidentiality provisions, particularly when seeking to dispose of their investment, and should not use confidential information for their own benefit.
Investors may be in possession of information which is not publicly available, and which has been communicated to them by the vehicle or the manager and which may be commercially sensitive. Investors intending to disclose potentially confidential information to third parties who are potential investors are expected to seek confidentiality undertakings satisfactory to and in favour of the vehicle from the relevant third parties. Investors may also involve the manager in discussions with these parties, and request that the manager delivers to potential purchasers such information as may reasonably be required.
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Further guidance for club deals and joint ventures
Control over investments
Investors participating in club deals and joint venturesare usually seeking greater control over the strategy and activities of the vehicle in order to set focused investment strategies and to control the destiny of their investment. Investors are therefore more likely to want greater involvement in the decision-making of the vehicle than would normally be the case for a multi-investor vehicle. In addition to the matters set out in CG10 of the guidelines normally reserved for investors, investors are likely to want to control the other matters set out in CG10 that may be reserved for non-executive officers. In particular, investors are likely to want to have control over the timing of acquisition and disposal of individual property assets, so that their investment behaves more like a direct property investment. Under the AIFMD, however, investment activities should be carried out by the manager, and investors should ensure that their desire to control investments does not conflict with the requirements of the AIFMD.
Non-executive officers
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 non-executive officer might not be relevant.
Role of the manager and fees
In club deals and joint ventures, the role of the manager may be that of asset manager, sourcing the assets and managing the day-to-day leasing and operational activities of the portfolio of properties. Fees may be less than for a multi-investor vehicle, given the reduced needs for vehicle management, as opposed to asset management. In addition, consideration should be given as to whether a performance fee to the manager would be appropriate, since the manager may not fully control the investment strategy, if the vehicle arrangements require approval of individual decisions by investors.
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Further guidance for open end and closed end vehicles
In this section we deal with variations in the application of the corporate governance guidelines to open end and closed end vehicles. In practice there is not a clear division between these two categories as vehicles may have characteristics of both. Nonetheless we set out how the governance for a pure open end vehicle may be expected to vary from a pure closed end vehicle.
Liquidity mechanism for investors
Closed end vehicles would typically have a fixed life, and investors would normally expect to invest at the start of the life of the vehicle, and redeem their investment towards the end of the life, as the vehicle sells its assets and winds down. Investors may have the ability to sell their investment on the secondary market, but would not normally expect to do so.
Open end vehicles, in contrast, typically last for an indefinite period, and provide clear mechanisms for new investors to subscribe for equity (or debt), and for existing investors to exit from their equity (or debt) position. Consequently, the constitutional terms governing subscription, valuation and redemption of equity (or debt investments) in the vehicle must be clearly set out for all investors and prospective investors, along with the anticipated liquidity for investors. Such terms are likely to be more developed in open end vehicles than in closed end vehicles.
Valuation guidelines
Given the importance of the mechanism for subscribing for and redeeming equity (or debt investments) in an open end vehicle, particular attention should be paid to the valuation and accounting principles applied. These valuation and accounting principles should be clearly set out in the constitutional terms and disclosed to any potential investors, including the frequency of such valuations. The vehicle should also follow INREV’s methodology for calculating and disclosing the INREV NAV. The constitutional terms should describe how the price for equity (or debt) subscription (bid price) and equity (or debt) redemption (offer price) are related to the INREV NAV.
Control or influence in decision-making
The constitutional terms will set out the extent of control or influence delegated to non-executive officers and investors in the running of a vehicle. In closed end vehicles, where investors are likely to be committed to the vehicle for its entire life, investors may seek some control or influence over certain decisions, as set out in CG10 of the guidelines. The degree of control or influence offered to investors can be less in open end vehicles, however, based on the assumption that investors should have the opportunity to exit the vehicle if the investment strategy of the vehicle no longer meets their investment objectives. Since the liquidity of open-ended vehicles cannot be guaranteed, it constitutes good governance to also provide for key investor rights in open end vehicles.
No-fault termination clauses
One indication of accountability of the manager is the existence in the constitutional terms of a clause providing for no-fault termination of the manager. A no-fault termination clause is less common in open end vehicles than in closed end vehicles, since investors who no longer wish the manager to run the vehicle, and who would vote for a termination of the manager if such a mechanism were available, may exit the vehicle through redemption. As the liquidity in open end vehicles may not be fully available it constitutes good governance to also provide for no-fault removal provisions in open end vehicles.
Co-investment by the manager
One indication of alignment of interests with investors is the manager having a meaningful co-investment in the vehicle as an incentive for the manager to perform. Co-investment by the manager is likely to be less important to investors in an open end vehicle than in a closed end vehicle, if a proven exit mechanism is available to investors who may be concerned about the commitment of the manager to run the vehicle.
Performance feeterms
Another indication of alignment of interests with investors is a performance fee structure that incentivises the manager to act in a way that is in the interest of the investors. Performance fee structures should be designed to suit the risk profile of the vehicle. Open end vehicles are typically core, not opportunistic, and so it would be expected that the balance of fees to the manager will be more weighted to base fees than for a closed end vehicle. In addition, the bid/offer price mechanism should take account of any accrued but unpaid performance fee.
Conflicts of interest
AIFMD specific requirements: The AIFM that manages an open-ended AIF shall identify, manage and monitor conflicts of interest arising between investors wanting to redeem their investments and investors wishing to maintain their investment in the AIF, and any conflicts between the AIFM’s incentive to invest in illiquid assets and the AIF’s redemption policy.
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Q&A
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Compliance of AIFM
To what extent should the Board of an AIF monitor the activities and level of compliance of its appointed AIFM?
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.
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Confidentiality
- The Corporate Governance Module: principle number 7 refers to confidentiality and principle number 5 to transparency.
- The INREV Due Diligence Questionnaires (DDQs) touch on confidentiality in the assessment process.
- INREV provides a standard non-disclosure agreement (NDA) with the purpose to replace the wide variety of NDAs currently being used in the industry.
Summary
- There should be free flow of information between existing investors and the fund. The fund documentation should prescribe a mutually binding confidentiality undertaking.
- If there is a business need to provide information outside of the investor group – for example, to a potential new investor looking to buy a secondary position – then the manager should be able to refer to the fund’s documentation, which should state clearly under which conditions and circumstances such information should be provided.
- The condition could be to ensure that the investor would be qualified for admission to the investment vehicle (e.g. minimum net worth tests, tax position et cetera).
- The manager should then provide confidential information provided that the outside party has signed an appropriate NDA.
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Corporate Governance Assessment - Why, Who, When?
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Why?
What are the advantages of the Corporate Governance Assessment?
The tool provides a practical way to measure the strength of a vehicle’s governance regime, by quantifying the level of compliance with the INREV Corporate Governance Guidelines. Compliance levels for different vehicles can be compared in a consistent way, and in future this can be set against the market as a whole – once a critical mass of funds have used the tool and agreed that their results can be aggregated for comparison purposes. It will also be possible to link a fund’s level of governance with other relevant INREV data, for example on the fund’s compliance with other Guidelines, or with its investment performance.
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Who?
Why should a fund manager use the tool?
Managers can show the vehicle’s compliance with industry guidelines to existing and new investors. It forms a base reference for further improving the vehicle terms and reporting of vehicle.
Why should an investor use the tool?
Investors will be able to use the assessments during their due diligence process to facilitate a dialogue with managers about corporate governance and reporting issues. The results will help to compare the governance of existing and potential investments in vehicles.
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When?
In which phases of the life cycle of a vehicle should the assessment be used?
The tool is intended to be used right through the vehicle’s life cycle, but especially during the set-up phase and at times when new investors can enter. It will help managers to provide a statement of compliance that can be used in the vehicle’s annual corporate governance report to investors, allowing them to show the vehicle’s level of compliance with industry guidelines. It provides a base reference point for improving the vehicle terms and its reporting framework.
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HOW OFTEN?
How often should the assessment be updated?
The Corporate Governance Assessment should be updated on an annual basis. If there is a significant restructuring of the vehicle, amendments in the side letters, or changes in the fund documents the assessment should be updated immediately.
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How long does it take?
How long does it take to fill in the questionnaires?
The time you need to fill in the questionnaire depends on your familiarity with the vehicle documents. Being properly prepared, the questions can be answered easily and additional information can be added easily by using the tool’s comment function. Going through the Corporate Governance Questionnaire is expected to take 15-20 minutes.
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Reporting
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Introduction Reporting
In principle, managers should report basic data annually including the characteristics of a vehicle, commentary on vehicle performance and an analysis of the relevant KPIs. The annual report also informs investors about the vehicle’s investment strategy, risk policies and exposures and how the manager has complied with its business objectives and policies.
The annual report is commonly composed of the annual review of the performance and activities of the vehicle for the year and the financial statements prepared under relevant GAAP. As well as an annual report, managers should provide interim reports to investors. The frequency and the level of detail of interim reporting should be defined in fund documentation. Interim reports commonly aim to update investors on the activities and performances of the vehicle during the interim period covered, and provide details of any significant changes that have or could have a material impact on the vehicle’s organisation, governance and risk profile. As well as interim reports, there may be other more informal investor updates and ‘flash’ reports which are prepared on a more frequent basis (e.g., monthly), which are outside the scope of the guidelines.
Quantitative data and KPIs, as defined in the Standard Data Delivery Sheet (“SDDS”), are an integral part of investor reporting under these guidelines and such information should be included in the reports to investors. This data can be presented in a separate attachment to the annual or interim reports (using the SDDS template) or embedded into the relevant section of the report itself depending on the manager’s preference.
For convenience, the reporting guidelines are grouped into the following sections:
- Content and frequency of reporting;
- General vehicle information, organisation and governance;
- Capital structure and vehicle-level returns;
- Manager’s report;
- Property report;
- Financing and financial risk management.
Annual and interim reporting to investors may include audited annual financial statements or abridged interim financial statements prepared in accordance with the appropriate generally accepted accounting standards. The fund managers are free to present the INREV report disclosures as a single package with the audited financial statements or in two separate documents. Some managers may also opt to provide investors full financial statements on an interim basis. Such financial statements may contain some of the information required to be disclosed by these reporting guidelines and can be referred to as appropriate. Information in the respective financial statements should be consistent with information presented in annual or interim reports as a whole.
The reporting guidelines focus on the content of investor reports but do not prescribe the organisation and format of such reports.
The INREV SDDS is a standardised data tool that provides investors with the main financial management information they require in a format that allows them to easily upload the data into their own systems. Each reporting requirement has been referenced to relevant SDDS data and shows the relationship between the content of annual and interim reports.
The principles and guidelines for reporting are listed below. The frequency column indicates whether the guidelines are an annual reporting requirement or an interim reporting requirement only. Where appropriate, further explanation is provided to assist your understanding. In addition, a tools and examples section contains a debt and derivatives disclosures note, a reporting self-assessment tool, the SDDS template, and examples for a sustainability report and reporting on capital calls and distribution.
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Principles
Annual and interim reporting should be consistent, transparent and provide meaningful information to investors.
The manager’s report should contain information relevant to gaining an understanding of the overall performance of the vehicle and factors that may affect performance in the future.
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Guidelines
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Fund documentation for reporting framework
The basis, frequency and timing of delivery of the audited and non-audited financial statements, and management reporting for investors should be defined in the fund documentation. The manager should provide at least one interim report to its investors, in addition to the annual report. |
Annual | Interim |
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Content and frequency of reporting
The quantitative information presented in the SDDS should be provided either using the SDDS template proposed by INREV or otherwise disclosed in annual and interim reporting to investors. |
Annual | Interim |
The financial statements provided in the annual report to investors should be audited. | Annual |
Elements of the overall package of annual and interim reporting to investors, however configured, should be internally consistent. For instance, information presented in the manager, property and other reports should be consistent with information in the SDDS template, if separate, and the financial statements. Also, the basis of preparation of information contained in interim reporting to investors should be consistent with annual reporting to investors. Any differences or exceptions should be explained. |
Annual | Interim |
Full year-end audited financial statements should be provided to investors. These should contain:
SDDS references: |
Annual |
Full year-end audited financial statements should be provided to investors. These should contain:
SDDS references: |
Annual |
Abridged interim financial statements should be provided to investors. Managers and investors should agree on the format of the interim financial statements. | Interim |
For interim reports, use the same terminology and KPIs as used in the annual report. If new terms or KPIs are used, the manager should explicitly define them. SDDS references: |
Interim |
For annual reports, describe the overall status of the vehicle’s INREV compliance. In doing so, disclose the level of compliance with INREV Guidelines by module. Include any relevant explanations, reconciliations and calculations as appropriate. Management (in the event that, for instance, INREV corporate governance framework is not being adopted) and/or non-executive officers/those in charge of governance should review this statement and the basis for making it. |
Annual |
For interim reports, disclose level of compliance with INREV interim reporting guidelines. Reference should be made to annual report for detailed description of the level of compliance with reporting requirements Management (in the event that, for instance, INREV corporate governance framework is not being adopted) and/or non-executive officers/those in charge of governance should review this statement and the basis for making it. |
Interim |
Disclose that the interim report should be read in conjunction with year-end investor report. | Interim |
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General vehicle information, organisation and governance
General information on the vehicle characteristics including, among others, name, domicile, legal form, vehicle style (by reference to INREV’s vehicle style definitions), description of vehicle structure, vehicle currency, vehicle year-end. SDDS references: |
Annual |
Interim Describe material changes |
Contact details of the vehicle. SDDS references: |
Annual |
Interim Describe material changes |
Describe the vehicle’s governance framework and the organisation of management and administration. For example, identify the AIFM, administrators, trustees, depositories, general partners, risk managers, investment advisors, portfolio managers, asset and property managers, valuers and other key functions as appropriate. SDDS references: |
Annual |
Interim Describe material changes |
Identify and discuss vehicle governance and oversight frameworks such as the use of independent directors and investor or other special committees, and how they operate. |
Annual |
Interim Describe material changes |
Describe the level of adoption of INREV corporate governance best practices. |
Annual |
Interim Describe material changes |
Annual and interim reports should describe the level of compliance with the corporate governance framework defined in the fund documentation. |
Annual |
Interim Describe material changes |
Present a short, high level summary of the vehicle strategy. SDDS references: |
Annual |
Interim Describe material changes |
ESG-LTS 1.1 Requirement – Vehicle Long Term Strategy Describe the overall approach to setting a long term ESG strategy for the vehicle. Make reference to the overall governance approach, which is covered in the INREV Corporate Governance Guidelines. Detail the long term (2 to 10 years) ESG strategy for the vehicle. As best practice you can consider the aspects set out below: Asset management ESG strategy:
ESG references: |
Annual
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Describe key milestone dates in the life of the vehicle (including vehicle term, investment period, closing dates, etc). SDDS references: |
Annual |
Interim Describe material changes |
Describe the investment stage of the vehicle in the context of key milestone dates, by sector/geography. SDDS references: |
Annual |
Interim Describe material changes |
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Capital structure and vehicle-level returns
Annual and interim reports should disclose any changes to the capital structure of the vehicle. |
Annual |
Interim Describe material changes |
In a tabular format, disclose the status of investor commitments and capital invested in the vehicle, and in particular:
In addition, the manager should disclose the expected drawn commitments, returns of capital/redemptions, capital calls and redemption requests for the following period. The manager may include assumptions used to determine these projections. SDDS references: |
Annual | Interim |
Summarise and comment on key investor returns and related metrics which are defined in section 7 of the SDDS (including comparison with targets, points of reference and indices when relevant). SDDS references: |
Annual |
Interim |
Disclose and discuss details of share class NAVs (accounting NAVs, trading NAVs, INREV NAVs as applicable) and variances since prior period-end. |
Annual |
Interim |
Disclose and discuss distributions made during the period and subsequent to the period-end (link with underlying transactions such as property disposals where relevant). SDDS references: |
Annual |
Interim |
Summarise how the vehicle’s fee structure impacts the vehicle’s capital structure and vehicle-level returns, for instance describe any fee capitalisation arrangements. SDDS references: |
Annual | Interim
Describe material changes |
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Manager's report
Summarise and discuss macro-economic factors which have, or may have, a material impact on the results of the vehicle. This should include information such as economic growth factors and their impact on the demand for new rentals, the supply of property or availability of development opportunities. Include also details of material changes in the tax and regulatory environment and debt financing conditions, such as movements in interest rates and financing terms. |
Annual | |
ESG-ANN 1.1 Requirement – Annual Objectives Based on the strategy of the vehicle described in ESG-LTS 1.1, set out the annual objectives and associated targets for the coming 12 month reporting period. As best practice you can consider the aspects set out below: Asset management ESG initiatives:
ESG references: |
Annual |
Tabulate for clarity a summary of significant events affecting the vehicle during the period as well as significant events anticipated in the 12 months from the balance sheet date. Provide a brief commentary on significant activities of the vehicle including acquisitions, disposals, distributions to investors, and changes to the overall financing or capital structure during the period. |
Annual | Interim |
Analyse the performance of the vehicle during the period by reference to relevant vehicle-level KPIs defined in sections 3.1, 3.2 and 5 of the SDDS, which include information such as the NAV, key financial ratios, valuation results, realised gains and losses and information related to operating results. SDDS references: |
Annual | Interim |
ESG-ENV 1.1 Requirement – Environmental Data Absolute data and like-for-like Disclose absolute environmental data and like-for-like data for the proportion of the vehicle’s portfolio that is in the fund manager’s operational control. This should cover:
Intensities Report the intensity ratios for energy and GHG emissions per property type. As best practice, the calculation methodology should be detailed, including applied normalization factors and which types of energy / types of GHG Emissions are included in the ratio. The environmental data should be presented in line with GRESB or GRI / EPRA methodology. Please disclose which methodology has been used. ESG references: |
Annual |
Describe and comment on the structure of fee arrangements with managers and affiliates (including details of any relevant capitalisation or disbursement programs, year-end balances, amounts earned, accrued, paid or clawed back). Link accrued and un-accrued amounts with the realisation of performance criteria. When applicable, this description should include details of:
Refer to the relevant sections of the financial statement disclosures for details as appropriate. SDDS references: |
Annual |
Interim Describe material changes |
Disclose the NAV of the vehicle and the basis of calculating it. Disclose to what extent the INREV NAV guidelines have been used to determine such NAV, and include details of adjustments made to reconcile the NAV with the financial statements. Include a description of the judgments and estimates used when determining the INREV or other NAV. SDDS references: |
Annual |
Interim Disclose the NAV and material changes to methodologies and assumptions |
Discuss the current period performance in the context of the track record of the vehicle (for instance, over the last five years). |
Annual |
Describe all significant subsequent events affecting the vehicle since the period-end and comment on their impact on vehicle performance if relevant. |
Annual | Interim |
Describe the likely developments in the vehicle’s business in the foreseeable future and how this is aligned with achieving the overall vehicle objectives. |
Annual |
Describe the impact of potential or implemented regulatory changes that affect or may affect the vehicle’s operations and performance. |
Annual | |
ESG-LTS 1.2 Requirement – Vehicle Long Term Strategy Detail the vehicle’s approach for ensuring compliance for current legislation relating to ESG issues is in place. ESG-ANN 1.2 Requirement – Annual Objectives Detail objectives for the next 12 month reporting period for ensuring compliance with current legislation in relation to ESG and about preparations for any future legislation that may be undertaken in this period. ESG-POR 1.2 Requirement – Annual Portfolio Information Report against compliance with current legislation requirements and objectives and associated targets for preparations for upcoming legislation. |
Annual |
Describe and comment on any significant one-off events having an impact on the results for the period. This disclosure should include, for instance, costs related to litigation, abort deal costs, one-off property related expenses and any other extraordinary or exceptional items. | Annual | Interim |
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Property report
Describe and comment on current developments in the vehicle’s investment property portfolio by reference to, for example, occupancy level, tenant profile by area occupied, average rent, the percentage of newly developed property that has been let or sold, etc. SDDS references: |
Annual | Interim |
Describe the business rationale for any significant acquisitions or disposals during the period, and their impact on the vehicle’s financial position and results. SDDS references: |
Annual | Interim |
For interim reports, show a summary of the portfolio allocation by sector and geography. SDDS references: |
Interim |
For annual reports, show a summary of the portfolio allocation by sector and geography and comment on it in the context of the investment strategy of the vehicle (refer to the detailed portfolio allocation sheet in the SDDS). SDDS references: |
Annual |
Summarise and comment on property valuation methods used for investment properties, properties under construction, land and ground leases. Include information on the methodologies used and the key market inputs and assumptions such as yields, discount or capitalisation rates. Describe any specific or special assumptions used in the property valuations such as assumed disposal scenarios, assumed capital expenditure and the treatment of transfer taxes. SDDS references: |
Annual |
Interim Describe material changes |
Disclose the proportion of the property portfolio which has been subject to an independent external valuation along with references to the name and qualifications of the valuers, and the date of such valuations. Include details of any modifications or reservations disclosed in the valuers’ reports. SDDS references: |
Annual |
Provide an analysis of like-for-like movements in the market value and rental income of properties held in the current and prior periods. |
Annual |
Comment on the development of rental growth and expected rental values by sector/geography. The market data provided should be relevant to the specific activities of the vehicle. |
Annual |
Interim Describe material changes |
Describe recent leasing renewal activity, including incentives given, rent-free periods and tenant improvement programs and expected future changes by reference to market trends in new lease terms. |
Annual |
Interim Describe material changes |
Summarise and comment on the development of vacancy rates and its impact on vehicle performance and future prospects. SDDS references: |
Annual |
Interim Describe material changes |
Discuss the developments of property yields, including yields by sector and geography. SDDS references: |
Annual |
Interim Describe material changes |
Discuss the developments of other key property information by sector and geography, when relevant. |
Annual |
Interim Describe material changes |
Identify and comment on rental concentration risk (either by expected rental value or actual rental value). |
Annual |
Interim Describe material changes |
Describe and comment on the level of property operating costs and, if significant, discuss the impact of specific factors such as service charge recoveries, bad debt write-offs and other property operating costs related to the vehicle’s performance. |
Annual | Interim |
If material, describe the impact of development activities on the vehicle by reference to, among other things, its investment strategy, development pipeline, stage of completion of developments, status of the sale of units or rental strategies. |
Annual | Interim |
ESG-POR 1.1 Requirement - Annual Portfolio Information Report against annual objectives and associated targets set for the vehicle as set out in ESG-ANN 1.1. ESG references: |
Annual |
Discuss and quantify significant capital expenditure programs either planned or being undertaken during the period for existing properties, such as renovations, extensions and improvements. SDDS references: |
Annual | Interim |
Quantify the amount of property development being undertaken during the period. Include details of the amount of properties completed and either transferred to investment properties or sold during the period. Include details of development costs, related commitments, and the method of accounting for property under development. SDDS references: |
Annual | Interim |
Describe and quantify the vehicle’s position in joint ventures and associate investments. Include details of, among other things, the methods of accounting for such positions, how they impact the overall financial and risk profile of the vehicle, and their business prospects. |
Annual | Interim |
Summarise and comment on returns from non-property investments such as positions in other vehicles, listed securities and other assets. | Annual | Interim |
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Risk management
Describe the principal risks faced by the vehicle. Describe and analyse the vehicle’s current exposure to such risks. Principal risks will cover, among others, areas such as:
Exposure to shareholder loans should be analysed separately from external loans. |
Annual |
Interim Describe material changes |
Describe the overall organisation of the risk management function and refer to key policies and procedures to monitor and mitigate exposures to key risks and uncertainties. |
Annual |
Interim Describe material changes |
Describe the current level of compliance with risk management policies by reference to current exposures. In addition, comment on specific breaches and remedial plans. |
Annual |
Interim Describe material changes |
In a tabular form, give details of the overall financing structure of the vehicle. Include information such as financing costs, security arrangements, recourse arrangements, maturity, and interest and loan amortisation terms. Refer to the financial statement disclosures as appropriate. SDDS references: |
Annual |
Interim Describe material changes |
Comment on the overall financing structure of the vehicle by reference to its overall strategy and future prospects. Such commentary should provide information on the status of material new debt arrangements, early debt reimbursements, and debt restructuring programs relevant to the period or anticipated in the foreseeable future. SDDS references: |
Annual |
Interim Describe material changes |
Describe and comment on the vehicle and SPV’s current key financing ratios, for example, interest service coverage ratio, property level loan to value, gearing ratio and the vehicle’s general level compliance with such ratios. SDDS references: |
Annual |
Interim Describe material changes |
Describe and comment on the use of derivative financial instruments and their impact on the vehicle’s performance. Disclose their key terms and fair values and their treatment in the financial statements and NAV. SDDS references: |
Annual |
Interim Describe material changes |
Describe and comment on the vehicle’s overall financing income and charges by reference to the vehicle’s financing structure, cash balances, changes in market conditions etc. SDDS references: |
Annual |
Interim Describe material changes |
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Other disclosure requirements
In exceptional circumstances, deviations by managers from property valuations as determined by external property valuers must be clearly explained and disclosed. If there is a disagreement between the manager and the property valuer on the market value parameters, these parameters must be clearly explained and disclosed. We expect these deviations and disagreements to occur only very rarely and if so, more in relation to opportunistic investments, where for example the manager and the external valuer have different views as to the likelihood of a particular event occurring (because, for example, the manager is in discussion with governmental bodies, potential buyers or tenants). Another example of deviation could be related to disagreement about value changes if there is a considerable time period between the actual date of external valuation and a later reporting date. Whatever the circumstances, appropriate internal procedures (including escalation measures) should be followed by the management in the event of valuation adjustments. |
Annual | Interim |
INREV NAV disclosure requirements Managers should make the following disclosures related to the NAV computation:
Explanatory notes to the reconciliation should describe key assumptions, methods used, and in particular:
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Annual |
Interim Describe material changes in methodologies and assumptions |
The constituent elements of the metric calculation should be disclosed in the annual report. | Annual |
A disclosure table should be presented that provides an analysis of all the components of the fees charged by the manager, including any element of performance fee or carried interest or any other such arrangement, or by any other affiliate or related party of the manager. See table in inrev-guidelines">Fee and expense metrics module. SDDS references: 11.17 -11. 20 INREV Expense Ratio, 11.23 REER, and Section 18 Investor's Portion of Fees to the Manager and Affiliates |
Annual |
The information in the following tables should be disclosed in the annual report. See table in inrev-guidelines">Fee and expense metrics module. |
Annual |
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Q&A
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Annual and interim reporting requirements
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.
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IFRS 16 requirements
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.
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Acquisition costs in case of merger of funds
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.
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Performance fee for INREV NAV calculation
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.
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Property Valuation
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Introduction Property Valuation
Property valuations, to a large extent, drive vehicle performance and Net Asset Value (NAV). Management and performance fees are also often directly or indirectly linked to property valuations. From an investor’s perspective it is therefore important to receive information from a vehicle which is based on a consistent and transparent approach to underlying property valuations. Other stakeholders including analysts, lending banks and market participants may also have an interest in valuations being prepared on this basis.
The aim of these guidelines is to define a common approach to property valuations that can be used for performance measurement, vehicle valuation and reporting.
The valuation guidelines should be seen as a minimum requirement from an investor’s perspective. Because investor requirements for property valuations do not generally differ between the various types of vehicle, no differentiation has been made in the best practice for open end or closed end vehicles. This means, for example, that the frequency of external property valuations for reporting purposes does not necessarily depend on the nature or type of the vehicle.
These best practice requirements are not aimed at giving recommendations or guidance regarding property valuations for unit pricing purposes.
The principles and guidelines for property valuation are listed below. Where appropriate, further explanation is provided to assist your understanding.
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Principles
Property valuations should be reliably, consistently and independently arrived at in compliance with regulations, undertaken by a professionally qualified valuer and transparently reported to investors.
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Guidelines
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Fund documentation for valuation framework
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.
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The valuer and related matters
The external valuer must be independent. When other services are provided by an external valuer which could possibly harm the independence of the external valuer, these must be disclosed.
When the external valuer firm involved in valuing a property is or has recently been involved in the leasing, sale or purchase of the property, or the firm earns significant fees for other services besides the external appraisal, this should be properly disclosed, including a description of these services.
The external valuer must have the appropriate professional qualifications and competence to perform the property valuation.
The external valuer should have a local and/or international professional appraisal accreditation, and should be authorised or regulated to undertake valuations in the country concerned for the intended purposes. They should also have the requisite level of competence and possess relevant market knowledge and experience in order to perform the property valuation.
The external valuer firm must demonstrate that the level of competence and expertise is maintained throughout the organisation and its key employees.
It is also important that the valuer is regulated by the local and/or international professional appraisal accreditation, for example through Royal Institution of Chartered Surveyors (RICS) valuer registration.
Any deviations from the above principles should be fully disclosed and explained.
A review of the continuing appointment or re-appointment of the external valuer firm should be undertaken 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 must 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 assessment may result in a rotation of external valuer firm. The assessment also includes an evaluation of whether the external valuer firm is properly insured against claims. In the event of rotation, there should not be any affiliation between the external valuer firms. Reference is also made to the code of conduct included in the INREV Corporate Governance framework.
The valuation fees of an external valuer should not be directly linked to the outcome of the valuation.
In addition, the valuer should not hold any shares in the valued interest and its remuneration for a given valuation mandate should not represent a significant amount of its total annual turnover.
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The valuation process
External property valuations must be performed at least once per year for all properties.
External property valuations are generally required for:
- (statutory) financial reporting;
- management reporting to shareholders and other stakeholders;
- performance measurement and (incentive) fee determination;
- regulatory authorities;
- securing finance / debt and on-going loan covenant compliance;
- corporate acquisitions and assessment of enterprise value.
Valuing property at least once per year does not mean all properties have to be valued at one time or necessarily at year-end, although this is best practice. More frequent external valuations or internal valuations may be undertaken to comply with the specific reporting requirements of the vehicle.
Although the professional valuation standards of the external valuers would already require physical inspection, this requirement has been included here in order to impose a partial responsibility in this respect on the manager as well.
In addition, for large portfolios, and based on its professional judgment, the external valuer may consider using a rotation principle on a three year rolling basis for the physical inspection of properties that have a homogeneous risk profile such as portfolios of residential units or storage space. If a rotation principle is applied by the external valuer, the manager should ensure that this approach is reasonable.
Newly acquired properties and properties undergoing significant (re)development activities should be included in the physical inspection sample of the year.
The manager must ensure that comprehensive, appropriate and transparent information is provided to the external valuer to enable it to undertake a proper valuation and to enable it to make its own assessment of expected costs, including estimates of long-term maintenance and/or ground pollution costs.
The manager must inform the external valuer in sufficient detail and not withhold any information that may be relevant to the property valuation. Examples of the kind of information provided by the manager to be used in determining property valuations and which may be verified by the external valuer with source documentation include lease/rent roll information, lease incentives granted, refurbishment costs, measurement data, property operating expenses, real estate taxes and any other information in connection with changes of market circumstances, tax and regulatory changes.
The manager should ensure that the legal ownership right (i.e., leasehold, freehold) and any restrictions or encumbrances are properly reflected in the value assessment.
The manager should provide the external valuer with all the latest developments regarding any known environmental issues.
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The valuation
The value of the property should be its market value or fair value.
The IVS Committee and The European Group of Valuers’ Associations (TEGOVA) define market value as “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion”. The IASB definition of fair value under IFRS 13 is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”.
In order to comply with professional international valuation standards, the market value estimate should, in principle, be free of any uncertainty clauses and special assumptions. Any special assumption or uncertainty clause should be adequately disclosed.
In order to comply with IFRS 13 the manager should ensure that the external valuer provides sufficient market evidence (if available in the market) and comparables to support all key assumptions used in the estimation of the market value.
Valuers should comply with a recognised international professional valuation standard.
Appointed valuers should comply with recognised international professional valuation standards such as International Valuation Standards (IVS), RICS or TEGOVA.
Transfer taxes and purchasers’ costs are deducted when determining the value of properties.
When determining the market value of a property, 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.
External valuation report must include information regarding the valuation method used for investment property, property held for sale, property under construction and ground leases, as well as applicable valuation inputs and market assumptions.
The valuation methods can include, among others:
- market approach - based on market comparables;
- income approach - based on income capitalisation;
- other valuation models based on earnings multiples or discounted cash flow methodology;
- replacement cost less depreciation (cost approach) should only be used in specific and rare circumstances when other valuation methods cannot be applied.
The valuation of property under construction can be based upon:
- fair value at completion less costs to complete (residual approach);
- cost approach should only be used in specific and rare circumstances when other valuation methods cannot be applied.
During the initial phases of the construction of a property, the level of uncertainty surrounding the fair value of the property is high. In this context, the fair value as determined using the residual approach may be equal to the consideration paid for the property plus subsequent construction costs.
The information regarding applicable market assumptions could, for example, include sensitivity analysis of rent movements and yield changes.
Note that for the purpose of the INREV NAV, valuations of property under construction must be stated at fair value. Refer to INREV NAV adjustments in module 4 - INREV NAV guidelines.
In the event of significant changes in market value resulting from a rotation of the external valuer, the manager must perform an assessment of the main underlying assumptions and provide full disclosure of the rationale for such changes.
Finally, the valuation methodology applied must lead to the market value regardless of the agreed valuation methodology as per management valuation regulations.
The valuation performed by the external valuer should be subject to the manager’s formalised internal valuation review and approval process.
The manager should ensure that the overall valuation is reviewed and approved internally for accuracy prior to its inclusion in the vehicle’s NAV and disclosure to stakeholders. The review and approval process should be impartial, objective, consistent and independent.
The review and approval should include the following controls, among others:
- the manager should ensure that the valuation timing and frequency is consistent with the valuation policies foreseen in the management regulations;
- the manager should ensure that the valuer’s valuation assumptions as well as valuation method used are appropriate with regard to the nature of the property to be valued.
The manager’s review can be adapted to the nature of the reporting, allowing for high level review for monthly or quarterly reporting as opposed to a full review for annual reporting.
The valuation must result in a single number.
Valuation ranges should not be used. However, if valuation ranges are provided by an external property valuer, it has to be clear which amount is being used in the reporting, for instance, the lowest, average or maximum value of this range.
In exceptional circumstances, deviations by managers from property valuations as determined by external property valuers must be clearly explained and disclosed.
If there is a disagreement between the manager and the property valuer on the market value parameters, these parameters must be clearly explained and disclosed. We expect these deviations and disagreements to occur only very rarely and if so, more in relation to opportunistic investments, where, for example, the manager and the external valuer have different views as to the likelihood of a particular event occurring (because, for example, the manager is in discussion with governmental bodies, potential buyers or tenants). Another example of deviation could be related to disagreement about value changes if there is a considerable time period between the actual date of external valuation and a later reporting date.
In such exceptional circumstances, the market value, as determined by the manager, must be reported in the balance sheet 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 measures) should be followed by the manager in the event of valuation adjustments.
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Further guidance on valuation in case of liquidity or winding-up
In certain circumstances, the manager should consider and adjust on a case by case basis if there is an impact on the market value due to a liquidation situation or a winding-up (such that valuation should reflect a non-going concern basis).
While a market value estimate should, in principle, be free of any uncertainty clause and special assumption, the manager should in certain circumstances consider the potential effect of a liquidation value since a vehicle may not have the time for appropriate marketing of property in, among others, the following circumstances:
- distressed situations;
- liquidity issues;
- portfolio transactions;
- constraints on marketing (for instance due to debt maturities or maturity of the vehicle).
The manager shall consider on a case by case basis if there is an impact and whether or not it can be measured. Such impact should be taken into account when preparing the INREV NAV.
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Performance Measurement
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Introduction Performance Measurement
The purpose of this Performance Measurement Module as part of the INREV Guidelines is to provide support to managers when computing and reporting historic performance measures of a vehicle. This module includes detailed computation formulae as well as examples to facilitate implementation. These guidelines have primarily been designed for direct property vehicles.
The guidelines aim to increase consistency in the reporting of performance to investors. The standardisation will also improve the relevance of indices, such as the INREV Index, which are potentially used as points of reference. Comparing the performance of a vehicle can add additional insight into a vehicle’s performance. The point of reference should contain vehicles with similar investment mandates, objectives or strategies.
The guidelines have been developed as a consequence of increased demand for standardised performance measures for non-listed real estate vehicles. Global Investment Performance Standards (“GIPS”) issued by the CFA Institute and the NCREIF PREA Reporting Standards have been considered when writing these recommendations. The level of effort for those managers that are in compliance with these standards should be limited to claim compliance with this module. Although the frameworks are different, the intention is to align the approaches and avoid conflicts in the methodologies. The Performance Measurement Module has also been developed in light of existing practice in the European non-listed real estate fund industry.
Performance measures and the level of disclosures may vary depending on the style of the vehicle (as determined in the INREV Fund Style Classification methodology). The level of discretion of a fund manager in determining the cash flows of a vehicle and investment restrictions vary significantly depending on the vehicle type. Some performance measures may not be appropriate for some vehicles. For instance, fund managers of closed ended vehicles have discretion over capital calls and distributions, while fund managers of open ended vehicles need to accommodate new issues and redemptions which may interfere with the portfolio strategy. In this context, money weighted returns are more relevant for closed ended vehicles whereas time weighted returns are more relevant for open ended vehicles.
Performance measurement guidelines include the minimum requirements to claim compliance with INREV guidelines. Managers are free to compute and disclose additional measures where they see fit.
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Principles
Performance measures of a vehicle should represent fairly the performance of a vehicle. They should be reliable, consistently computed and presented to enable investors to understand and compare the performance of the vehicle.
Performance measurement should reflect the performance of the vehicle in the context of its style, type, structure and strategy.
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Guidelines
Vehicle documentation should include the required performance measures disclosed by the manager and the frequency of disclosure to investors.
Managers should disclose the computed performance measures and methodology used. If the manager chooses to use a formula not in line with the proposed methodology set out in this module, this should be fully disclosed and explained.
Presentation of the vehicle level performance should be accompanied by adequate disclosures. The purposes of such disclosures are to provide present and potential investors with a precise and complete picture of the vehicle’s historic performance.
Performance measures should be calculated at the same frequency as the published NAV valuation of the vehicle, with annual being the minimum frequency.
It is expected that the investments owned by a vehicle are measured at fair value, whatever GAAP is used by the manager to determine the NAV of the vehicle.
Periods where a vehicle does not perform valuations can still be a data point as long as a NAV is determined. For instance a vehicle may provide quarterly NAVs, but only annual property valuations. In interim periods the NAV would reflect all changes of the balance sheet while holding the value of the property portfolio constant.
Some measures required in the guidelines may be less relevant during the investment/disinvestment period. However, managers are still required to provide the measures included in this module. Managers may provide comments alongside the measures to explain that the measures may be distorted due to the fact that the vehicle is its investment/disinvestment period.
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Open end vehicles |
Closed end vehicles |
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Performance measures described below are established at vehicle level. In addition, all performance measures are net of all costs borne by the vehicle. The Managers are free to disclose additional measures such as property level performance measures. |
✔ |
✔ |
Time weighted returns are the preferred performance measure to use when a manager does not have control over the cash flows of the investment. This is typically seen in open ended vehicles and non-discretionary single client account portfolios. The Modified-Dietz Method is the used throughout the financial industry. |
✔ |
✔ |
A total return on a time weighted basis should be disclosed in the annual report. This measure should be provided on a one, three, five and ten year period (where the track record exists) and since inception on an annualised basis. A total return is computed as follows:
Annualisation is computed as follows: Where there is a return that is greater than 1 year, but not a full year period (e.g. one year and two months) For full years the formula is as follows: When a return greater than one year is annualised, it is also allowed to consider the exact number of days. |
✔ | ✔ |
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 component.
Open ended vehicles | Closed ended vehicles | |
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An income return should be disclosed. This measure should be provided on a one, three, five and ten year period (where a track record exists) and since inception on an annualised basis. An income return is computed as follows: Net investment income = the net operational income of a vehicle, on an accruals basis, containing the income and cost described below. This excludes any capital transactions or movements in the reported period, including valuation gains or losses on assets and liabilities, transaction costs, sale proceeds and taxes on capital profits and losses. The components of net investment income are:
TwdC = Time weighted (daily) contributions for the measurement period |
✔ | ✔ |
Open ended vehicles | Closed ended vehicles | |
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A capital return should be disclosed. This measure should be provided on a one, three, five and ten year period (where a track record exists) and since inception on an annualised basis. A capital return is computed as follows: TwdC = Time weighted (daily) contributions for the measurement period |
✔ | ✔ |
Open ended vehicles | Closed ended vehicles | |
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A distributed income return should be disclosed. Distributed income return is computed as follows: TwdC = Time weighted (daily) contributions for the measurement period Distributions include dividends and interests paid during the period. Returns should be calculated on a money weighted basis where weight is put on the size and timing of the cash flows reflecting the manager’s control over in- and out-flows of the vehicles. |
✔ | ✔ |
Open ended vehicles | Closed ended vehicles | |
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Since Inception Internal Rate of Return (“SI-IRR”) should be disclosed. SI-IRR is computed as follows: This is otherwise known as a money-weighted return. |
✔ |
Open ended vehicles | Closed ended vehicles | |
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A paid-in capital multiple or paid-in capital to committed capital multiple (PIC) should be disclosed. PIC is computed as follows: PIC PIC (Paid-in Capital) = Cumulative capital contributed to the vehicle CC (Committed Capital) = Cumulative capital plus undrawn capital. |
✔ |
Open ended vehicles | Closed ended vehicles | |
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An Investment Multiple or Total Value to Paid-in Capital Multiple (“TVPI”) should be disclosed. TVPI is computed as follows: TV PIC (Paid in capital) = cumulative capital contributed to the vehicle |
✔ |
Open ended vehicles | Closed ended vehicles | |
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Realisation Multiple or Cumulative Distributions to Paid-in Capital multiple (“DPI”) should be disclosed. DPI is computed as follows: D D = Distributions Distributions retained in the vehicle and not paid to the investors are considered as realised. |
✔ |
Open ended vehicles | Closed ended vehicles | |
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An Unrealised Multiple or Residual Value to Paid-in Capital Multiple (“RVPI”) should be disclosed. RVPI is computed as follows: RV |
✔ |
Open ended vehicles | Closed ended vehicles | |
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The following items should be disclosed alongside the performance measures:
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✔ | ✔ |
Open ended vehicles | Closed ended vehicles | |
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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. A manager should take reasonable care not to apply points of reference where the 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, the objective may be used as a primary reference point as long as clearly disclosed. |
✔ |
Open ended vehicles | Closed ended vehicles | |
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Where a composite and a point of reference are disclosed, they should be described. |
✔ | ✔ |
Open ended vehicles | Closed ended vehicles | |
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Where a composite is presented a composite description must be disclosed. |
✔ | ✔ |
Open ended vehicles | Closed ended vehicles | |
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The time period and frequency of cash flows used in the calculation should be disclosed. |
✔ |
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Considerations
The following considerations and methodologies are to be used when determining performance measures:
Performance measurement computation
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 aggregate NAV and cash flow basis.
GAAP
The methodologies described below assume that components of measures are determined in accordance with module 4 - inrev-nav#inrev-guidelines">INREV NAV, which is determined based on IFRS financial statements. Where this is not possible reference should be made to IFRS or local GAAP.
Dates of cash flows
Dates used for performance calculations should be based on cash flows between investors and the vehicle at the date as determined for accounting purposes. As a minimum, monthly and annual cash flows must be used however it is now common to use quarterly and daily cash flows where adoption would be encouraged, especially for open ended vehicles. For capital calls, the deadline of the capital call is to be used.
Open ended vehicles are subject to a potential constant in- and out-flow 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 ended vehicles should apply the dates where cash flows are called or distributed to investors. The date should reflect the effective date for capital calls where the capital should be paid in and for distributions where the capital was paid by the vehicle.
Valuation of properties
Property should be valued in accordance with guidelines defined in module 3 – Property Valuation.
Fees
Vehicle level performance measures may be calculated on three main levels:
- net of both management and performance fees (required);
- net of management fees (as defined in module 6 - Fee and Expense Metrics), but gross of performance fees (carried interest) (optional);
- gross of all management fees (optional).
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 to/of the investors should not be considered when they are earned by the 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 of the vehicle, performance measures should include these fees as if the fees had been billed directly to/inside the vehicle.
Currencies
Default performance should always be calculated in the vehicle denominated currency in order to reflect the true performance of the vehicle.
Performance measurement computation
To illustrate the combined performance of multiple vehicles, composite performance maybe presented which combines the performance of each vehicle in a standardised way over time.
Grouping criteria
To ensure fair representation of composite performance, vehicles included in the same composite must share one or more common attribute.
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 manager defined);
- Structure (open vs closed ended);
- Strategy;
- Points of reference;
- Leverage.
For closed ended vehicles composite performance should preferably be defined by the combination of vintage year and one of the above mentioned attributes.
All vehicles (both historic and live) in a manager’s track record must be included in a composite if a vehicle matches the grouping criteria. Where a vehicle matching the grouping criteria has been excluded from the composite, reasons for doing such is disclosed.
Calculation methodology
Time weighted return composite performance should be calculated by weighting the performance of each participating vehicle or segregated account with its share of the total composite’s size. The weighting is done at the same frequency as the valuations of the vehicles and time weighted.
For closed ended vehicle composites a since inception IRR is presented. As cash flows of vehicles participating in the composite are all sharing common vintage year and attributes, aggregating cash flows do not constitute a problem.
Further considerations for multiple computation
Some vehicles have the ability to recycle capital during the investment period (to reinvest returned equity capital). For equity multiple 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 direct by the manager without physically distributing back to investors (to eliminate the back-and-forth flow of cash).
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INREV NAV
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Introduction INREV NAV
INREV’s objective in establishing these guidelines is to provide managers with guidance on how to calculate and disclose an INREV NAV in financial reports of non-listed European real estate vehicles. This should lead to transparency and comparability of the performance of different types of vehicle and will enable investors to understand the information provided.
One of the purposes of reporting is to present investors with information relevant to the performance and valuation of their investment. The NAV derived from generally accepted accounting principles (GAAP), including IFRS, does not necessarily fulfil this objective. This guidance has therefore been prepared to provide an industry specific framework to enable managers to calculate a more meaningful adjusted NAV.
Both investors and managers seek an approach that is consistent across the real estate industry. The application of different accounting standards has also led to inconsistency of calculation of an adjusted NAV. Investors and managers also want to be able to compare the performance and valuation of non-listed European real estate vehicles against other vehicles.
INREV NAV should reflect a more accurate economic value of the investment (units) based on the fair value of the underlying assets and liabilities, as at the balance sheet date, as adjusted for the spreading of costs that will benefit different generations of investors, as compared to a NAV based on generally accepted accounting principles.
The main aim of the NAV is to compare vehicle performance across a peer group and for the valuation of the investment in the units for accounting purposes at the investor level. It is not intended to be a measure of the net realisable value of the vehicle units at the balance sheet date, which might be impacted by a wide range of other factors.
The principles and guidelines of how INREV NAV is determined are listed below. Where appropriate, further explanation is provided to assist your understanding. In addition, a tools and examples section includes a sample INREV NAV calculation containing many of the common adjustments that are required to derive an INREV NAV from financial statements prepared under IFRS. Finally a series of questions and answers has been added to provide further assistance with common queries.
The INREV NAV guidelines override the accounting principles by making adjustments to the results arrived at by following the chosen GAAP.
INREV NAV adjustments require material judgment by the manager (e.g., deferred tax, transfer taxes). Consequently, it is important to include sufficient disclosures to allow investors to understand positions taken by the manager.
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Principles
INREV NAV should reflect a more accurate economic value of the investment (units) based on the fair value of the underlying assets and liabilities, as at the balance sheet date, as adjusted for the spreading of costs that will benefit different generations of investors, than the NAV based on generally accepted accounting principles.
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Guidelines
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Fund documentation for INREV NAV framework
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.
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INREV NAV Adjustments
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:
Total | |
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NAV per the IFRS financial statements | x |
Reclassification of certain IFRS liabilities as components of equity | |
a) Effect of reclassifying shareholder loans and hybrid capital instruments (including convertible bonds) that represent shareholders long term interests in a vehicle | x |
b) Effect of dividends recorded as a liability which have not been distributed | x |
NAV after reclassification of equity-like interests and dividends not yet distributed | x |
Fair value of assets and liabilities | |
c) Revaluation to fair value of investment properties | x/(x) |
d) Revaluation to fair value of self-constructed or developed investment property | x/(x) |
e) Revaluation to fair value of investment property held for sale | x/(x) |
f) Revaluation to fair value of property that is leased to tenants under a finance lease | x/(x) |
g) Revaluation to fair value of real estate held as inventory | x/(x) |
h) Revaluation to fair value of other investments in real assets | x/(x |
i) Revaluation to fair value of indirect investments not consolidated | x/(x) |
j) Revaluation to fair value of financial assets and financial liabilities | x/(x |
k) Revaluation to fair value of construction contracts for third parties | x/(x |
l) Set-up costs | x/(x) |
m) Acquisition expenses | x/(x |
n) Contractual fees | x/(x) |
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 | x/(x) |
p) Revaluation to fair value of deferred taxes and tax effect of INREV NAV adjustments | x/(x |
q) Effect of subsidiaries having a negative equity (non-recourse | x/(x) |
Other adjustments | |
r) Goodwill | (x) |
s) Non-controlling interest effects of INREV adjustments | x/(x) |
INREV NAV | x |
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 disposal of a property is expected within one year, and therefore, the redemption of the related bank debt is also expected within one year, 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.
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Tools and examples
Local GAAP to INREV NAV templates
https://www.inrev.org/library/inrev-nav-gaap-comparison-templates-2020
Example - INREV NAV computation
Vehicle details:
Multi-sector;
Single-country vehicle: Euroland;
Reporting under IFRS.
Note: the example does not include all required disclosures.
Assets | Notes | Amount | Liabilities and Equity | Notes | Amount |
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Investment property | 1 | 4,500 | Vehicle capital (NAV) | 7 | 1,000 |
Investment property under construction | 2 | 350 | Deferred tax liability | 8 | 100 |
Inventory property | 3 | 250 | Fixed rated debt | 9 | 3,000 |
Finance lease | 4 | 100 | Shareholder Loans | 10 | 2,245 |
Deferred tax asset | 5 | 25 | Derivative financial instruments | 100 | |
Investment property held for sale | 6 | 1,275 | Other liabilities | 11 | 55 |
Total | 6,500 | Total | 6,500 |
Summary of accounting principles and notes
1) Investment property
The investment property is valued at fair value under the fair value option of IAS 40. The current fair value of the property based on an independent valuation report is 4,500. The vehicle is structured as far as possible as a tax neutral structure. All investment properties are held by special purpose vehicles (SPVs). Management’s strategy is to sell all properties through the sale of the shares in the relevant SPVs. It is estimated that this method will save the potential purchaser approximately 200 of transfer taxes.
2) Investment property under construction
Investment property under construction is composed of a self-constructed or developed investment property valued at cost until construction or development is complete. The current fair value of the property under construction based on an independent valuation report is 400.
3) Inventory
Property classified as inventory is measured at the lower of cost or net realisable value. Currently, such inventory is carried at cost in the balance sheet. The current fair value of the property held for sale based on an independent valuation report and including a provision for disposal costs is 300.
4) Finance lease
Property that is leased to tenants under a finance lease is initially measured at the initial net investment and subsequently re-measured based on an amortisation pattern reflecting a constant rate of return. Key assumptions include: Lease contract rent: 6%. Current rent: 7%. The current fair value of the finance lease based on current market interest rate conditions is 125.
5) Deferred tax asset
The deferred tax asset is measured in the financial statements at the nominal statutory tax rate. The nominal tax rate is 25%. This deferred tax asset relates to the revaluation of the derivative financial instruments. Management’s opinion is that a tax rate of 12.5% should be used to reflect the fair value of the deferred tax position concerning the derivative financial instruments.
6) Investment property held for sale
The vehicle is in the process of selling a property located in Euroland. The property has been reclassified as investment property held for sale and is measured at fair value in accordance with IAS 40 which does not include disposal costs of 30.
7) Vehicle equity (NAV)
The vehicle capital structure does not include any options, convertibles and other equity interests other than shareholder loans (see below).
Details of the equity structure of the vehicle are as follows:
In addition to the performance fee arrangement included as a contractual liability, the manager of the vehicle, shareholder A, has a preferred right to an additional 10% of the profit of the year when an IRR hurdle rate is reached. The hurdle rate was reached for the first time in 2013. The profit for 2013 amounts to 100.
The vehicle shareholders are as follows:
Units | % | |
---|---|---|
Shareholder A | 1 | 0.1 |
Shareholder B | 333 | 33.3 |
Shareholder C | 333 | 33.3 |
Shareholder D | 333 | 33.3 |
Total units issued | 1,000 | 100 |
8) Deferred tax liability
The deferred tax liability is measured in the financial statements at the nominal statutory tax rate. The nominal tax rate is 25%. This deferred tax liability relates to the revaluation of the investment property. The vehicle is structured as a tax neutral structure. All investment properties are held by special purpose vehicles (SPVs). Management’s strategy is to sell all properties through the sale of the shares in the relevant SPVs. It is currently estimated that the sale will not lead to any payments to tax authorities but the deferred tax liability will be settled between the seller and the purchaser. Current market practice for this settlement is estimated to be 50% of the nominal rate.
9) Fixed rate debt
Debt is initially recognised at fair value net of transaction costs and subsequently measured at amortised cost using the effective interest rate method. Key assumptions include: Debt interest 5%. Current interest 5.25%. The current fair value of the fixed rate debt is estimated to be 2,850.
10) Shareholder loans
The financial statements under IFRS show shareholder loans of 2,275. The shareholder loans are judged to form part of the long term interest of the vehicle’s shareholders.
11) Other liabilities
Under the vehicle’s constitution, a component of income in a period is contractually required to be paid out to shareholders. Consequently, other liabilities include undistributed dividends of 30.
12) Set-up costs
Set-up costs are expensed immediately at the inception of the vehicle. The total amount of set-up costs is 100. The vehicle was incorporated in 2010. It is assumed that set-up costs are not deductible.
13) Acquisition expenses
Under the fair value model, acquisition expenses of an investment property are charged to income as a component of fair value changes at the first subsequent measurement date after acquisition.
Building | Amount | Year of acquisition | |
---|---|---|---|
1 | Building A | 50 | 2010 |
2 | Building B | 70 | 2011 |
3 | Building C | 30 | 2012 |
4 | Building D | 60 | 2013 |
We have assumed that the acquisition costs are incurred on 1 January each year.
14) Contractual fees
Under the other liabilities an obligation is recorded in relation to the fair value of potential performance fees for an amount of 10.
15) Subsidiaries with negative net equity
The vehicle holds a 100% interest in a subsidiary which is in a position of negative equity. The vehicle currently has no intention or constructive obligation to fund the losses. The current accumulated negative equity (including shareholder loans) included in the consolidated accounts relating to this subsidiary is 100.
INREV NAV Calculation
Total | Notes | |
---|---|---|
NAV as per the IFRS financial statements | 1,000 | |
Reclassification of certain IFRS liabilities as components of equity | ||
Effect of reclassifying shareholder loans and hybrid capital instruments | 2,245 | |
Effect of dividends recorded as a liability which have not been distributed | 30 | |
NAV after reclassification of equity-like interests and dividends yet distributed | 3,275 | |
Fair value assets and liabilities | ||
Revaluation to fair value of investment properties | ||
Revaluation to fair value of self-constructed or developed investment property | 50 | 1 |
Revaluation to fair value of investment property held for sale | (30) | |
Revaluation to fair value of property that is leased to tenants under a finance lease | 25 | 2 |
Revaluation to fair value of real estate asset held as inventory | 50 | 3 |
Revaluation to fair value of other investments in real assets | ||
Revaluation to fair value of indirect investments not consolidated | ||
Revaluation to fair value of financial assets and financial liabilities | 150 | 4 |
Revaluation to fair value of construction contracts for third parties | ||
Set-up costs | 20 | 5 |
Acquisition expenses | 104 | 6 |
Contractual fees | ||
Effects of the expected manner of settlement of sales/ vehicle unwinding | ||
Revaluation to fair value of savings of purchaser’s costs such as transfer taxes | 200 | |
Revaluation to fair value of deferred taxes and tax effect of INREV NAV adjustments | (16.1) | 7 |
Effect of subsidiaries having a negative equity (non-recourse) | 100 | 8 |
Other | ||
Goodwill | ||
Non-controlling interest effects of INREV adjustments | ||
INREV NAV | 3,927.9 |
Notes to the INREV NAV
1. Revaluation to fair value of self-constructed or developed investment property
Value per IFRS financial statements | 350 |
Value per INREV Guidelines | 400 |
INREV NAV adjustment | 50 |
The adjustment represents the impact on the NAV of the measurement of the self-constructed or developed investment properties to fair value.
2. Revaluation to fair value of property that is leased to tenants under a finance lease
Value per IFRS financial statements | 100 |
Value per INREV Guidelines | 125 |
INREV NAV adjustment | 25 |
In the financial statements, properties that are leased to tenants under a finance lease are initially measured at the net investment and subsequently based on a pattern reflecting a constant rate of return. The adjustment represents the impact on the NAV of the measurement of such finance leases to fair value.
3. Revaluation to fair value of inventory property
Value per IFRS financial statements | 250 |
Value per INREV Guidelines | 300 |
INREV NAV adjustment | 50 |
The adjustment represents the impact on the NAV of the measurement of the properties intended for sale recorded using the lower of cost or net realisable value model to fair value less disposal costs.
4. Revaluation to fair value of financial assets and financial liabilities
Value per IFRS financial statements | 3,000 |
Value per INREV Guidelines | 2,850 |
INREV NAV adjustment | 150 |
In the financial statements, debt is initially measured at fair value net of transaction costs and, generally, subsequently measured at amortised cost using the effective interest method. The adjustment represents the impact on NAV of the measurement of all debt and related derivatives to their fair values.
5. Set-up costs
In 2010, an amount of 100 of vehicle set-up costs was expensed immediately to the income statement prepared under IFRS. In accordance with INREV Guidelines, these vehicle set-up costs have been capitalised and amortised over the first five years of the life of the vehicle. During the year 2013, the vehicle amortised an amount of 20, resulting in a cumulative amortisation of 80. The manager assesses that no impairment should be recorded as it is not to be expected that the capitalised set-up costs can be recovered through the sale of the units of the vehicle.
6. Acquisition expenses
From 2010 to 2013, acquisition expenses amounting to 210 were expensed immediately to the income statement prepared under IFRS. In accordance with INREV Guidelines, these acquisition expenses have been capitalised and amortised over the first five years after the acquisition of the buildings. During the year 2013, the vehicle amortised an amount of 42, resulting in a cumulative amortisation of 106. The unamortised amount at 2013 is 104.
The manager assesses that no impairment should be recorded as it is not to be expected that the acquisition expenses can be recovered through the sale of the units of the vehicle.
7. Deferred tax
The deferred tax assets and liabilities are measured in the financial statements at the nominal statutory tax rate. The manner in which the vehicle expects to settle deferred tax is not taken into consideration. The adjustment represents the impact on the NAV of the deferred tax for the assets and liabilities of the vehicle (in this case properties and derivative financial instruments) based on the expected manner of settlement (i.e., when tax structures have been applied to reduce tax on capital gains or allowances, this should be taken into consideration).
Based on the example, the following adjustment would be made:
Deferred tax | Exit assumption | Temporary taxable difference |
Effective tax rate |
NAV adjustment |
---|---|---|---|---|
Revaluation to fair value of self-constructed or developed investment property | Share sale | 50 | 12.5% | (6.3) |
Revaluation to fair value of inventory | Asset sale | 50 | 25% | (12.5) |
Revaluation to fair value of property that is leased to tenants under a finance lease | Share sale | 25 | 12.5% | (3.1) |
Revaluation to fair value of financial assets and financial liabilities | N/A | 150 | 12.5% | (18.8) |
Acquisition expenses | Share sale | 104 | 12.5% | (13) |
Existing deferred tax measured at fair value | 37.5 | |||
Total Effect on NAV | (16.1) |
Key assumptions that support the computation are as follows:
- Management’s opinion is that a tax rate of 12.5% should be used to reflect the fair value of the deferred tax position concerning debts and related derivative financial instruments. For the adjusted NAV calculation all potential other deferred taxes are valued at 50% of the nominal rate.
- Property assets accounted for as inventory are expected to be sold in asset deals and therefore the full statutory rate has been applied to the temporary taxable difference;
- Under IFRS reporting the deferred tax liability for investment property is based on a nominal rate of 25%. All investment properties are held by SPVs. Management’s strategy is to sell properties only through the sale of the shares in the SPVs. The sale will not lead to any tax payments. The deferred tax liability will be settled between the seller and the purchaser. Market practice for this settlement is 50% of nominal rate;
- The difference between the fair value of properties leased to tenants under a finance lease and the corresponding tax book value is expected to reverse as an effective rate of 12.5%, taking into account the vehicle tax structure and likely exit scenario.
- The existing deferred tax measured at fair value is calculated by multiplying the difference between the deferred tax asset and deferred tax liability by 50%.
8. Effect of subsidiaries having a negative equity (non-recourse)
The vehicle holds a 100% interest in a subsidiary which is in a position of negative equity. The vehicle currently holds no intention or constructive obligation to fund the losses. The current accumulated negative equity (including shareholder loans) position is 100. An adjustment of 100 is therefore made to the INREV NAV.
9. NAV per share
Computation | NAV/share | ||
---|---|---|---|
Shareholder A | 10% of profit + 0.1% of the remaining NAV | (10%*100 + 0.1% x (3,927.9-10))/1 | 13.9179 |
Shareholder B | 33% of NAV minus performance allocation to shareholder A | (33.3% x (3,927.9-10))/333 | 3.9179 |
Shareholder C | 33% of NAV minus performance allocation to shareholder A | (33.3% x (3,927.9-10))/333 | 3.9179 |
Shareholder D | 33% of NAV minus performance allocation to shareholder A | (33.3% x (3,927.9-10))/333 | 3.9179 |
The NAV per share is calculated based on the INREV NAV adjusted for any preferences due to shareholders based on the current equity structure. Initially, profit allocation to preferred shareholders is calculated, and then the remaining INREV NAV is allocated according to the current equity structure.
Related Tools & Examples |
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Q&A
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Capitalisation and amortisation of set-up costs and acquisition expenses
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.
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Is it required to start with an IFRS NAV to calculate the INREV NAV?
As described in module 4 of the INREV guidelines, INREV’s objective in establishing these guidelines is to provide managers with guidance on how to calculate and disclose an INREV NAV in financial reports of non-listed European real estate vehicles. This should lead to transparency and comparability of the performance of different types of vehicles.
One of the purposes of reporting is to present investors with information relevant to the performance and valuation of their investment. The NAV derived from generally accepted accounting principles (GAAP), including IFRS, does not necessarily fulfil this objective. The INREV guidelines have therefore been prepared to provide an industry specific framework to enable managers to calculate a more meaningful adjusted NAV.
For the sake of clarity, all of the adjustments presented in the guidelines are based on IFRS. However, IFRS also offer some options and INREV adjustments may differ based on the selected option (i.e: cost versus fair value). Consequently, the guidelines are describing all the adjustments which should be done in order to compute an INREV NAV.
Taking this into consideration, it is not mandatory to first calculate an IFRS NAV, adjustments can be applied directly to the chosen GAAP as long as the fund manager clearly understands the purpose of the adjustments and amends the adjustments accordingly.
If the adjustments are performed correctly, the INREV NAV should be the same whatever the initial starting point GAAP was.
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Materiality assessment of INREV NAV adjustments
How can fund managers and investors access their own materiality and disclose this?
Calculating INREV NAV, the question might arise if a certain suggested INREV NAV adjustment would have a material impact on the total INREV NAV.
The reason might be that a fund manager has to take some effort to collect, assess, calculate and evaluate all data and information that is needed to come to a correct INREV NAV Adjustment with sufficient disclosure.
Expecting only immaterial effects and considering the cost-benefit-ratio fund managers might want to decide not to include a certain adjustment.
INREV does not feel to be in the position to determine an accepted amount or % of materiality for INREV NAV Adjustments since materiality level could be different for each vehicle, fund manager, investor or other user of the INREV NAV (for example indices).
Guidance on Materiality can be found in the International Standard on Auditing (ISA) 320: Materiality in Planning and Performing an Audit.
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Materiality in the Context of an Audit
Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of financial statements. Although the topic is approached in different terms, it is generally explained that:
- Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements;
- Judgments about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both; and
- Judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group. The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered.
Determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen point of reference as a starting point in determining materiality for the financial statements/INREV NAV as a whole.
In the case of a regulated vehicle, the determination of materiality for the financial statements/adjusted NAV, INREV NAV as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances, INREV NAV adjustments or disclosures) is/might therefore be influenced by law, regulation or other authority.
Based on circumstances a fund manager could assess if there is a need for a materiality. The materiality could be used to decide not to include certain adjustments.
Since assessing materiality levels might be a complex exercise, INREV recommends to request the auditor of the vehicle what the specific materiality is that he is using for the audit of the financial statements as a whole.
If a fund manager for what so ever reason does not want to include one or more adjustments, the impact on the total INREV NAV should be assessed as a whole. Leaving out one or more individual immaterial adjustments can sum up to a total material error
Further guidance on determining materiality can be found on the website of www.ifac.org.
If the fund manager decided not to include an adjustment, since he expects that leaving out that adjustment should not have a material effect on the INREV NAV in total, proper disclose should be provided.
The fund manager shall include in the disclosure notes to the INREV NAV calculation sufficient background of his decision and the following amounts and the factors considered in their determination:
- Which adjustments are not included as a result of materiality;
- What the rational is for not included these adjustments;
- A statement that in the opinion of the fund manager not including the(se) adjustment(s) does not have a material effect on the INREV NAV as a whole;
- If applicable, the materiality level or levels for particular classes of transactions, account balances, INREV NAV adjustments or disclosures
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INREV NAV Fair Value of DTL of properties
VERNI Real Estate S.A. - and notes
The Balance sheet and Profit and Loss account of VERNI Real Estate S.A. are prepared according to IFRS accounting principles.
The Balance sheet and Profit and Loss account of VERNI Real Estate S.A. are prepared according to IFRS accounting principles.
Accounting principle IFRS
Current and deferred income tax
The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised directly in other comprehensive income or equity - in which case, the tax is also recognised in other comprehensive income or equity.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the date of the statement of financial position in the countries where the Group operates. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation, and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the date of the statement of financial position and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
The carrying value of the Group’s investment property is assumed to be realised by sale at the end of use. The capital gains tax rate applied is that which would apply on a direct sale of the property recorded in the consolidated statement of financial position regardless of whether the Group would structure the sale via the disposal of the subsidiary holding the asset, to which a different tax rate may apply. The deferred tax is then calculated based on the respective temporary differences and tax consequences arising from recovery through sale.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
Initial recognition exemption
DTL should be recognized for all taxable temporary differences, except when DTL arises from [IAS12.R15]:
- The initial recognition of goodwill or;
- The initial recognition of an asset or liability in a transaction which:
- is not a business combination and
- at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss)
No deferred tax liability should then be recognised because of the initial recognition exemption rule.
INREV NAV principle on deferred taxes
(Revaluation to fair value of deferred taxes and tax effect of INREV NAV adjustments)
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.
Tax structure
- A fund is structured that it has 6 properties in different countries.
- These are held via 4 SPV's.
Tax structure |
|||||||
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Property name | Deal 1a | Deal 1b | Deal 2 | Deal 2 | Deal 3 | Deal 4 | |
Company | Company 1 | Company 1 | Company 2A | Company 2B | Company 3 | Company 4 | |
Category | Investment properties | Investment held for sale | Investment properties | Investment properties | Investment properties | Finance lease | |
Country of company | BE | BE | NL | NL | GER | NL | |
Country of property | BE | BE | NL | NL | GER | NL | |
Tax rate | 34% | 34% | 31% | 31% | 22% | 31% | |
Commercial book value | 43,000,000 | 13,500,000 | 19,000,000 | 52,000,000 | 67,000,000 | 18,750,000 | 213,250,000 |
Fair value | 44,500,000 | 16,500,000 | 20,000,000 | 54,000,000 | 69,000,000 | 19,500,000 | 223,500,000 |
Tax book value | 40,475,000 | 12,575,000 | 17,925,000 | 48,650,000 | 63,150,000 | 17,687,500 | 200,462,500 |
Exit Strategy | Share deal | Property deal | Share deal | Property deal | Share deal | Share deal | |
DTL saving allo-cated to seller % | 50% | 50% | 40% | 40% | 60% | 40% | |
DTL booked in the IFRS accounts | 0 [1] | 1,334,500 | 643,250 | 1,658,500 | 1,287,000 | 561,875 | 5,485,125 |
[1] Due to initial recognition exemption (FV at acquisition 45,000,000)
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Calculation of adjustment in respect of deferred tax liability
How should this adjustment be calculated? Is it appropriate to calculate this as a fixed percentage (e.g., 50%) of the deferred tax liability calculated for the vehicle under IFRS/local GAAP on a portfolio basis or any other aggregate basis?
The rationale behind this adjustment is that under IFRS (and many other GAAPs) deferred tax liabilities are measured at the nominal statutory tax rate. The manner in which a vehicle expects to settle deferred tax is generally not taken into consideration. Accordingly, the provision calculated on this basis may not be representative of the fair value of deferred tax liabilities (i.e., the actual amounts expected to be crystallised upon disposal of the property assets).
In calculating the adjustment of the fair value of the liability, based on the expected manner of settlement, the adjustment should be assessed on an asset-by-asset basis.
For each asset, therefore, consideration should be given as to the most likely form of disposal (e.g., asset deal or share deal) based on the intended disposal method and tax structuring of the asset as well as market conditions relevant to that property as at the date of calculation. Assumption of changes in disposal method based on as-yet unrealised future changes in market conditions are considered too subjective for the purposes of calculating the INREV NAV adjustments. If applicable, the history of the entity with regard to disposals should also be considered. The fair value of the deferred tax liability is then calculated in accordance with the assessed manner of settlement as well as the applicable rates at which the transaction would be taxed. IFRS allows only the rates that have been enacted or substantially enacted at the balance sheet date to be used whereas rates which have been enacted or substantially enacted after the balance sheet date can be used for the purposes of calculating the INREV NAV adjustment.
The calculation should also take into account any discounts to the sale price of a property sold via a share deal that are likely to be granted. For example, it may be that the sale of the shares of the property-owning entity is exempt from tax (or attracts minimal tax) but a deduction in respect of the latent capital gain within the property owning entity is made in arriving at the sale price. This amount in addition to any tax likely to crystallise on the disposal transaction should be taken into account when calculating the INREV NAV adjustment.
On this basis, therefore, a fixed percentage approach as outlined above will not be appropriate unless it represents a reasonable estimate of the adjustment required in respect of the deferred tax liability for each of the individual properties in the portfolio.
It is imperative to ensure that the calculation of the adjustment, either in part or in full, is not already included within the deferred tax liability calculated for the vehicle under IFRS/local GAAP, so as to avoid double-counting of the adjustment. Care should also be taken to ensure that there is no double-counting between this adjustment and the INREV adjustment on transfer taxes with regard to the valuation of property. For avoidance of doubt, transfer taxes should not be included within the scope of the deferred taxation adjustment calculation.
Given the subjective and complex nature of this calculation, therefore, it is recommended that managers document a formal internal policy with regard to the calculation methodology and review the policy on an ongoing basis (for example, with respect to changes in tax law and market conditions) in order to ensure that it remains appropriate. Disclosure should be given on the overall tax structure, including the overall ownership structure, key assumptions and broad parameters for each country, what the maximum taxation calculation would be on a traditional basis (i.e., without tax structures) and the approximate tax rate as a percentage.
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Calculation of adjustment in respect of transfer taxes
How should this adjustment be calculated? Is it appropriate to compute this as a fixed percentage (e.g., 50%) of the transfer taxes for the vehicle under IFRS/local GAAP?
The calculation of the adjustment to the deduction of transfer tax (and other purchaser’s costs) inherent in the property valuation based on the expected manner of settlement, should be assessed on an asset-by-asset basis.
For each asset, therefore, consideration should be given as to the most likely form of disposal (e.g., asset deal or share deal) based on the intended disposal method and tax structuring of the asset as well as market conditions relevant to that property. If applicable, the history of the entity with regard to disposals and the agreed allocation of the tax burden between the seller and the purchaser should also be considered. This is the same rationale as for the calculation of the deferred tax liability adjustment. Where the assessed disposal method would result in a reduction in the transfer taxes (and purchaser’s costs) in the fair valuation of the property, this adjustment is made in arriving at the INREV NAV. However, the adjustment should only be included to the extent to which it is not already included in the property valuation, in order to avoid double-counting.
For this reason it is important that transfer taxes and other purchaser’s costs are considered as separate components when computing the adjustment. The same reduction may not be appropriate in both cases. For example, a share deal disposal may result in lower transfer taxes but may, in fact, increase the other purchaser’s costs due to the need for additional legal expenditure and diligence required to complete any such deal.
On this basis, therefore, a fixed percentage approach as outlined above will not be appropriate unless it represents a reasonable estimate of the adjustment required for both transfer taxes and other purchaser’s costs for each of the individual properties in the portfolio.
Given the subjective and complex nature of this calculation, therefore, it is recommended that managers document a formal internal policy with regard to the calculation methodology and review the policy on an ongoing basis (for example, with respect to changes in tax law and market conditions) in order to ensure that it remains appropriate. Adequate disclosures should also be provided so that users of the financial information can understand the calculation methodology with regard to the adjustment, as well as the key assumptions that the manager has made in the calculation and how the manager expects to utilise this additional value based on the current structure and market circumstances.
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Investment in an associate/joint venture
How should the INREV Guidelines be applied when valuing an entity’s investment in an associate/joint venture which is accounted for in the IFRS/local GAAP accounts of the entity (using either the equity method or proportionate consolidation)?
For the purposes of the INREV NAV, management’s best estimate of the fair value of the entity’s holding in the associate/joint venture should be used. Depending on the type of investment there will be a hierarchy of valuation methods in order to assess this:
1. If the investment is quoted on an active market then the fair value should be calculated using the quoted price as at the calculation date;
2. For investments in vehicles where there is a right of redemption at a contractually set NAV, then this should be used to value the holding irrespective of whether this NAV is consistent with INREV Guidelines;
3. If the investment is in a closed end vehicle or a similar type of entity and there is no fixed redemption price or listed price then the fair value of the holding should be estimated so as to be consistent with INREV Guidelines;
4. If there is not sufficient information available to compute the INREV NAV of the investment then another valuation technique should be used including, for example, an estimate based on recent comparable transactions if these are available.
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Portfolio premium/discount
Should the INREV NAV calculation include a portfolio premium/discount where, for example, the independent appraiser’s valuation report includes a statement that the portfolio as a whole would command a premium/discount in addition/decrease to/of the individually appraised values of each property?
The portfolio premium/discount should not be included in the INREV adjusted NAV and, according to the INREV Guidelines for property valuation, should not be included within the fair value of property. Nevertheless it is recommended that any such premium or discount be disclosed separately.
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Held-to-maturity derivatives
Is it not the case that, for open end vehicles, there is no need for fair valuations for hedging derivatives on the basis that upon maturity the value of these should be nil?
For both closed end and open end vehicles, the diluted INREV NAV should reflect all hedging derivatives at their fair value.
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Fee and Expense Metrics
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Introduction Fee and Expense Metrics
The module has been updated to replace TER by the TGER. For vehicles to be compliant with the INREV Guidelines a transition period has been put in place. Vehicle may choose to either report a TER or TGER before reporting periods ending on 31 December 2020. See Q&A on TGER reporting periods.
The objective of this module is to clarify the calculation and disclosure of the INREV fee and expense metrics: The Total Global Expense Ratio (“TGER”) and the Real Estate Expense Ratio (“REER”). These form part of the standard measures included in the regular reporting of overall performance to investors in a vehicle. When analysed in the context of vehicle style, investment strategy and underlying risks, these fee and expense metrics will help those involved in the non-listed real estate market – both institutional investors and managers – to compare fee and cost structures between different non-listed vehicles and with other investment structures.
INREV aims to improve consistency in the presentation and categorisation of fees and expenses when comparing vehicles from different domiciles. The aim is to provide the greatest possible comparability while also maximising the availability of relevant information in fee and expense metrics. INREV fee and expense metrics have been designed to be straightforward, easy to understand and compatible with the vehicle’s normal reporting cycle.
Fee and expense metrics should reflect the nature of the expenses concerned, in line with the various types of services for which managers charge fees, and the basis on which they charge them. There should be clear disclosure of all the fees that the manager charges, together with the activities to which they relate.
It is important to analyse and explain fee and cost ratios in their correct context. For instance, the TGER for different vehicles should be compared taking account of historical and forecasted return.
At vehicle launch, investors have a particular interest in understanding its forward-looking or projected operating expenses compared to the amount of invested capital, as well as the potential impact of the cost structure on the overall investment return. Accordingly, INREV supports the principle of including forward-looking expenses in the vehicle’s launch documentation.
The principles and guidelines for reporting fee and expense metrics are listed below. Where appropriate, further explanation is provided to enhance the reader’s understanding. In addition, the Tools and Examples section includes a typical calculation of INREV fee and expense metrics.
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Principles
Comparability - Fees and costs should be consistently categorised, defined and presented, to support investors and managers to compare vehicle performance.
Transparency - There should be clear and appropriate disclosure of the fees and costs charged to the vehicle. Investment managers should also explain the calculation methodology and assumptions used. Communication of all relevant information should be open, accessible and easy to understand.
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Guidelines
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Vehicle documentation for fee and expense metrics framework
Vehicle documentation should include a statement of the level of compliance with this module and of the fee and expense metrics that are expected to be disclosed to investors by the manager.
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Fee and expense metric requirements
Fees and costs should be measured in line with the principles defined under INREV NAV and INREV GAV.
Fees describe charges borne by the vehicle for services provided by the manager and costs describe charges to a vehicle by external service providers. Fees charged by the manager directly to their investors are not taken into account, with the exception of fees charged for services rendered to the vehicle.
Where a single fee is charged to cover a variety of activities, the constituent elements will need to be identified, allocated to the appropriate cost category and disclosed appropriately.
Historic Total Global Expense Ratio
A historic TGER, based on the time-weighted average INREV GAV of the vehicle over twelve months, should be provided annually.
This approach removes the effect of leverage and provides a more relevant comparison between investment vehicles with different capital structures. Depending on the investor needs, investment managers may also provide a historic NAV TGER based on the time-weighted average INREV NAV.
If considered meaningful, managers may compute and disclose TGER on a quarterly basis (annualised), since inception, or on rolling multiple period averages. The approach should be consistent with the fee and cost allocation and computation methodology on an annual basis.
For the calculation methodology, daily weighting of cash flows is recommended. If not feasible, at a minimum, quarterly figures should be used to calculate the time weighted average INREV GAV and INREV NAV.
The components of the numerator include the vehicle fees and costs for the reporting period, as defined below.
Certain fees and costs, such as property-level costs charged by the manager, should not be included when calculating the TGER; they do however form part of the REER (see below). If the manager charges a single fee covering both property and vehicle management activities, it should be split into its constituent elements.
The formulae for TGER are:
The TGER is an historic or ‘actual’ figure, based on data published annually. Consequently, newly launched vehicles cannot have an historic TGER.
Historic Real Estate Expense Ratio
An historic REER, based on the time-weighted average INREV GAV of the vehicle over twelve months, should be disclosed annually.
While the TGER relates to the operating costs borne by the vehicle, the REER captures only those costs that relate to the management of the real estate assets. The REER includes the property-specific costs described below.
The numerator should include the fees and costs associated with managing the properties, while the denominator should be the time-weighted average INREV GAV.
The formula for REER is:
Forward-looking ratios
Forward-looking ratios and metrics are useful items in the vehicle documentation. However, they are ‘theoretical’, in that they are based on estimated costs, anticipated numbers of assets, and assumptions such as growth rate, vehicle life and tax structuring. Requirements for forward-looking fee and expense metrics at the vehicle launch stage are described below. Once the vehicle has commenced operations, there should be no further requirement for forward-looking metrics as historic metrics based on historic data should then be available.
Forward-looking Total Global Expense Ratio
A forward-looking TGER, based on the time-weighted average INREV GAV for the first year when the vehicle is expected to be stabilised, should be provided in the vehicle documentation. A forward-looking NAV TGER based on the time-weighted average INREV NAV may also be provided. These measures should be calculated following the same methodology as for a historic TGER and for NAV TGER, although they will be based on estimates.
The forward-looking TGER and NAV TGER should be accompanied by disclosure of the estimates used to calculate this metric.
Forward-looking real estate expense ratio
A forward-looking REER, based on the time-weighted average INREV GAV of the vehicle for the first year when the vehicle is expected to be stabilised, should be provided in the documentation. This should be calculated following the same methodology as for an historic REER, although it will be based on estimates.
The forward-looking REER should be accompanied by a disclosure of the estimates used to calculate this metric.
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Fee and expense metrics calculation
Expense ratio cost classification
Fees and costs should be classified consistently for the purpose of calculating the INREV fee and expense metrics. Fees and costs included in TGER are categorised according to the respective nature of the underlying services. To the extent that the fee is charged for a service provided by the manager in lieu of a service provided by a third party, and is charged in addition to the fund management fee, or is otherwise disclosed separately from the fund management fee, it should be classified according to the nature of the service rather than whether the service is provided by the investment management or third party.
Vehicle fees included in the TGER comprise of:
A. Ongoing management fees and transaction-based management fees:
- Asset management fees;
- Fund management fees;
- Wind-up fees;
- Debt arrangement fees;
- Commitment fees;
- Subscriptions fees;
- Redemption fees;
- Property acquisition fees amortization of the year;
- Property disposition fees;
- Project management fees.
Where a single fee is charged to cover a variety of activities, the constituent elements will need to be identified, allocated to their appropriate category and disclosed appropriately.
B. Performance fees:
- Performance fees;
- Incentives and promotes;
- Carried interest;
- Other performance fees.
Fee reductions, fee waivers, and transaction offsets recognised in the financial statements of the vehicle, should be disclosed as part of the ongoing investor reporting, and included in TGER. Existence of fee rebates should be disclosed if permitted under the provisions of the vehicle documents. Fee reductions, fee waivers, and transaction offsets not recognised in the financial statements of the vehicle are excluded from the TGER and may be disclosed if permitted.
Vehicle costs:
- Audit costs;
- Bank charges;
- Custodian costs;
- Dead deal costs;
- Debt arrangement costs;
- Other/miscellaneous vehicle costs;
- Professional service costs (incl. valuation costs and vehicle formation costs (amortisation for the period));
- Placement agent costs;
- Staff costs (if applicable);
- Transfer agent costs;
- Vehicle administration costs;
The costs incurred by Special Purpose Vehicles (“SPVs”), which sit above the acquisition structure in the holding structure, are included in vehicle expenses. Costs of this nature that are charged to the acquisition vehicle should also be included in this category.
Property fees included in the REER are directly attributable to the management and the maintenance of specific properties. These fees comprise:
- Asset management fees (certain services not included in the TGER);
- Internal leasing commissions;
- Property management fees;
- Development fees.
Property costs included in the REER are directly attributable to the management and the maintenance of specific properties. These costs comprise:
- External leasing commissions;
- Property acquisition costs (amortisation for the period);
- Other/miscellaneous/sundry costs;
- Property insurance costs;
- Property management costs;
- Repairs and maintenance costs;
- Taxes on property-related activities;
- Utilities costs (non-rechargeable portion).
Fees and costs excluded from the TGER and REER comprise:
- Deferred taxes on property-related activities
- Development costs;
- Disposition costs;
- Fair value adjustments;
- Gain/loss on currency exchange rates;
- Gain/loss on investment disposition;
- Goodwill write-off;
- Impairment of goodwill;
- Losses on disposal of subsidiaries;
- Payments related to financial derivatives;
- Provisions and allowances;
- Receivables write-off costs;
- Rent free/discounts;
- Securities handling charges;
- Share of losses of associates and joint ventures;
- Taxes on real estate transactions;
- Unwinding of discounts and effect of changes in discount rate on provisions.
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Fee and expense metrics disclosures
The constituent elements of the metrics calculations should be disclosed annually.
Disclosure table | Current year/ period | Prior year/period |
TGER | ||
NAV TGER (recommended) | ||
REER | - |
The following notes clarify the components of each fee and expense metric and should also be read in conjunction with the classifications shown in the fees and costs matrix.
Constituent elements | Current Year/Period (Amount & Currency) | Prior Year/Period (Amount & Currency) |
Ongoing management fees |
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Transaction-based management fees |
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Performance fees |
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Vehicle costs |
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Time-weighted average GAV (required) |
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Time-weighted average NAV (recommended) |
There should also be a clear disclosure of all the fees charged by the manager and the activity to which they relate. A disclosure table should be presented annually providing an analysis of all components of the fees (including any element of performance fee) earned by the manager or by any other affiliate or related party of the manager, for the management of the vehicle.
Fees earned by the investment manager | Current Year / Period (Amount & Currency) | Prior Year / Period (Amount & Currency) |
Asset management fees | ||
Fund management fees | ||
Performance fees | ||
Wind-up fees | ||
Debt arrangement fees | ||
Commitment fees | ||
Subscription fees | ||
Redemption fees | ||
Property acquisition fees | ||
Property disposition fees | ||
Project management fees | ||
Fees earned by the manager incl. in TGER | ||
Other fees earned by the manager excl.from TGER |
The fees included in this table should be accounted for in the financial statements for the financial reporting period concerned, in accordance with accounting conventions used by the vehicle.
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Tools and examples
The previous guidelines with the TER is available on INREV-Fee-and-Expense-Metrics-Guidelines-2019_0.pdf">INREV Fee and Expense Metrics Guidelines with TER.
Related Tools & Examples |
Applied Tags |
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Q&A
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How should the INREV GAV be calculated for the Total Global Expense Ratio (TGER) and the Real Estate Expense ratio (REER)?
For the disclosure of the INREV TGER and REER a calculation based on INREV GAV is required.
In using/preparing the INREV TGER and REER the question might arise about which components should be included in calculating the (INREV GAV) denominator of these ratios.
The fund manager should be transparent in its reporting to investors and explain the methodology and assumptions used for the calculation of the GAV, as required by both INREV NAV and Fee and Expense Metrics modules.
The Total Assets derived from Generally Accepted Accounting Principles (GAAP), including IFRS, could be used as a starting point in the calculation of the denominator of the ratios presented in the Fee and Expense Metrics module.
INREV suggests to start from the same accounting framework as it was used in calculating the INREV NAV, i.e., IFRS, local GAAP or other vehicle specific GAAP.
From there, the various adjustments should be included, or excluded, to come to an INREV GAV that can be used in the calculation of the INREV TGER and REER.
In preparing this Q&A the guidance provided to the users should be read in light of the requirements included in the Fee and Expense Metrics module.
It should be noted that the INREV GAV used for the INREV TGER and REER calculation might be different than an adjusted GAV used for performance measurement or other disclosure requirements. Additional adjustments could be included, or excluded, to come to an adjusted GAV to better suit a particular purpose.
The INREV GAV guidance overrides the accounting principles by making adjustments to the results arrived at by following the chosen GAAP.
INREV GAV adjustments require some material judgment by the manager. Consequently, it is important to include sufficient disclosures to allow investors to understand positions taken by the manager.
In this Q&A, 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 as a starting point, further adjustments may be required to align with IFRS for determining the INREV GAV. References to further guidance by INREV on the interpretation of fair value and provision accounting are also included.
For the use of calculating the INREV TGER and REER, a vehicle GAV calculated in accordance with IFRS should be adjusted for the following items:
INREV GAV adjustment table:
Total | |
GAV per the IFRS financial statements (Total Assets) | x |
Fair value of assets | |
a) Revaluation to fair value of investment properties | x/(x |
b) Revaluation to fair value of self-constructed or developed investment property | x/(x) |
c) Revaluation to fair value of investment property held for sale | x/(x) |
d) Revaluation to fair value of property that is leased to tenants under a finance lease | x/(x) |
e) Revaluation to fair value of real estate held as inventory | x/(x) |
f) Revaluation to fair value of other investments in real assets | x/(x) |
g) Recognition to fair value of indirect investments not consolidated | x/(x) |
h) Revaluation to fair value of financial assets | x/(x) |
i) Revaluation to fair value of construction contracts for third parties | x/(x) |
j) Set-up costs | x/(x) |
k) Acquisition expenses | x/(x) |
Effects of the expected manner of settlement of sales/vehicle unwinding | |
l) Revaluation to fair value of savings of purchaser’s costs such as transfer taxes | x/(x) |
Other adjustments | |
m) Goodwill | x(x) |
n) Derecognition of financial derivatives | x/(x) |
o) Derecognition of deferred tax assets | x/(x) |
INREV GAV | x |
Fair value of assets
a) 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 GAV 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 GAV.
b) 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 GAV of the revaluation of the self-constructed or developed investment property to fair value under the fair value option of IAS 40.
c) 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 GAV of the revaluation of the investment property intended for sale, measured at fair value or cost, to the net realisable value (fair value less disposition costs).
d) 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 GAV of the revaluation of the finance lease receivable to fair value.
e) 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 GAV of the revaluation of such properties to net realizable value (fair value less disposition costs). This adjustment should be included under the caption ‘revaluation to fair value of real estate held as inventory’.
Where the likely disposition date is more than one year from the date of the GAV computation, disposition costs should not be deducted from fair value in calculating this adjustment..
f) 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 GAV of the revaluation of other investments in real assets to fair value in accordance with the fair value assumptions under IFRS 13.
g) Recognition to fair value of indirect investments not consolidated
Indirect investments in real estate, such as investments in associations and Joint Venture ">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 GAV of the recognition of indirect investments not consolidated and depending on the type of investment at fair value.
Under this adjustment, two situations can be identified:
1. Investments for which fees and costs are proportionally taken into consideration in the calculation of the fee and expense metrics
The adjustment represents the impact on GAV when including the proportional GAV of the associations and joint ventures based on the share that the vehicle holds.
In this case, all assets should be included proportionally for the share that the vehicle holds in the assets of the associations or joint venture. These assets should be valued in accordance with the guidance provided herein. All corrections should be taken into consideration and should be reflected, as applicable, when calculating the INREV GAV for the purpose of preparing the INREV TGER and REER.
2. Investments for which fees and costs are not taken into consideration in the calculation of the fee and expense metrics
The adjustment represents the impact on GAV of the revaluation of indirect investments to fair value, if not yet accounted for at fair value. Reference is made to the INREV NAV guidelines, and more specifically to Q&A-4 of the INREV NAV module.
h) Revaluation to fair value of financial assets
Financial assets are generally measured at amortised cost, taking into account any impairments (when applicable). The adjustment represents the impact on GAV of the revaluation of financial assets to fair value, as determined in accordance with IFRS, if not yet accounted for at fair value.
i) 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 GAV 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 smoothen the immediate impact 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. Such adjustments are taken into account in the calculation of the ratio numerator included in the Fee and Expense Metrics module.
Since the INREV GAV is primarily intended to facilitate comparability between different vehicles, the INREV approach is a simple but stable methodology where these capitalised costs are subject to an impairment test each time the GAV is calculated and therefore should always be recoverable over time.
j) 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. Furthermore these costs are taken into account in the calculation of the ratio numerator included in the Fee and Expense Metrics module.
When capitalising and amortising set-up costs, a possible impairment test should be taken into account every time the adjusted GAV 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 off.
k) 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. Furthermore these cost are taken into account in the calculation of the ratio numerator included in the Fee and Expense Metrics module. When capitalising and amortising acquisition costs, a possible impairment test should be taken into account each time the adjusted GAV 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.
Effects of the expected manner of settlement of sales/vehicle unwinding
l) 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 GAV 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 disposition strategies has been made. Reference should be made to both the current structure and prevailing market conditions.
Other adjustments
m) 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 GAV as determined under IFRS, they should be written off in the INREV GAV.
n) Financial derivatives
This adjustment relates to the derecognition of any financial derivatives which are reported on the asset side of the balance sheet.
This relates to all financial derivatives as interest instruments, cash flow instruments and or currency exchange instruments. The rationale is that all the expenses/charges in respect to these instruments are linked to a liability or exempted for the calculation of the ratio numerator included in the Fee and Expense Metrics module.
o) Deferred tax assets
This adjustment relates to the derecognition of any deferred tax assets which are reported on the asset side of the balance sheet. The rationale is that all the expenses/charges in respect to taxes are linked to a liability or exempted for the calculation of the ratio numerator included in the Fee and Expense Metrics module.
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How should staff costs be allocated to the TGER and the REER?
It may happen that some vehicles have hired employees. Related staff costs should be allocated based on the activity of the employees.
For instance, the wage and related costs of employees working on property related matters should be allocated to property expenses and therefore included in the REER.
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Determination and disclosure of quarterly ratios
How should fee and expense metrics be determined in case a fund manager wishes to disclose quarterly ratios?
INREV Guidelines require the computation of the fee and expense metrics on an annual basis. Fund managers may provide investors with quarterly ratios. INREV Guidelines do not propose any methodology to compute quarterly ratios.
Fund managers can indeed disclose quarterly fee and expense metrics to investors. The methodology should be consistent with the methodology used for the fee and expense metrics in the annual reports, particularly on the cost classification and computation methodology.
The quarterly metrics should be presented on a rolling four quarter basis.
The fund manager should be transparent in its reporting to investors and explain the methodology and assumptions used.
In case a fund manager discloses quarterly ratios, the fund manager is still required to disclose the annual metrics in the annual reporting to comply with requirements included in the fee and expense metrics.
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How do you determine if a service is in lieu of or in addition to third party costs?
Generally, when a function and its related services is frequently outsourced to third parties and the vehicle designates the investment manager to perform this function internally, then the services provided by the investment manager are deemed to be in lieu of third-party services. Conversely, when there is already a charge from a third-party for services related to a specific function, and due to task complexity, the investment manager provides oversight or performs other complementary services for the benefit of the vehicle, then these services provided by the investment manager are deemed to be in addition to third party services.
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Can TGER including tax be calculated and presented to investors?
If considered meaningful, a TGER tax may be also calculated and disclosed by the investment manager to reflect the cost associated with tax structures and taxable income.
The formulae are presented below:
Vehicle taxes included in the TGER comprise:
- Corporation tax;
- Income tax;
- Non-resident landlord tax;
- Other taxes based on gross profit;
- Net wealth tax;
- Deferred tax;
- VAT or other sales tax (only recoverable portion);
- Withholding tax;
- Capital gain taxes;
- (Transfer) taxes on real estate transactions.
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What are the main differences between TGER and TER? Do I need to convert previously reported TERs?
TGER represents a natural progression from the previously reported INREV TER and includes several additional fees. A mapping of TER to TGER is summarised below, including its main components.
Conversion of previously reported TERs is not necessarily. The numerator of TGER bears much similarity to the TER. It is important to note however that historical comparisons depend on the life cycle and activity of the vehicle and should be treated with caution.
Allocation of main fees and costs from TER to TGER | Workings |
Asset and fund management fees | |
Performance fees | |
Other fees earned by manager | |
Total vehicle fees for TER | A |
Audit, valuation, custodian, transfer agent and other admin costs | |
Vehicle formation costs and dead deal costs | |
Bank charges and other professional service costs | |
Total vehicle costs for TER | B |
Adjustments for TGER | |
Property acquisition and disposition fees | |
Project management fees | |
Debt arrangement fees and costs | |
Fee and costs adjustments for TGER | C |
Vehicle taxes (optional, for after-tax TGER calculation) | |
Vehicle tax adjustments for TGER | D |
Time-weighted average GAV | E |
Time-weighted average NAV | F |
Required ratio: TGER | (A+B+C)/E |
Recommended ratio: NAV TGER | (A+B+C)/F |
Optional ratio: (NAV)/TGER after tax | (A+B+C+D)/E or(F) |
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Should TGER be compared against expense metrics of listed structures / public market vehicles?
TGER was designed to consider all relevant elements of a non-listed real estate vehicle load – including both fees and costs. Care should be taken to ensure an “apples to apples” comparison of similar measures disclosed for public markets / listed real estate investments as several adjustments may be required in case of listed structures, e.g. overhead expenses may be structured differently.
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How should Asset Management fees be allocated to TGER?
Certain services under the Asset Management fee are not included in the TGER as they are directly attributable to the building and thus still part of the REER. These may include managing of capex, management of leases, refurbishment design, management of construction progress, etc. The investment manager should use best judgement to split its asset management fee services between what is directly attributable to the building and the vehicle management activities, e.g. strategic input, production of asset level business plan.
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Should TGER be presented for financial reporting periods ending on or after 31 December 2020? Can the INREV TER still be disclosed?
The reporting periods for compliance with TGER are presented in the table below. TGER disclosures will be required for reporting periods ending on or after 31 December 2020. Whilst the TER remains an optional disclosure for investment managers beyond this date, its disclosure will cease to form part of INREV Adoption and Compliance Framework from reporting periods ending on or after 31 December 2020. Nevertheless, next to TGER, managers may choose to continue calculating and disclosing a TER figure on a temporary basis if considered meaningful for historical comparison.
INREV expense ratio reporting period |
Period/Year ended 31 Dec 2020 |
Fiscal year ended 31 Mar 2021 |
Fiscal year ended 30 Jun 2021 |
Fiscal year ended 30 Sep 2021 |
Period/Year ended 31 Dec 2021 |
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TGER | Required | Required | Required | Required | Required |
TER | Optional | Optional | Optional | Optional | Optional |
In addition, managers have the option to also compute and disclose TGER on a quarterly basis (annualised), starting with Q4 2020 reporting periods. The approach should be consistent with the fee and cost allocation and computation methodology on an annual basis.
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Updates
The latest update: March 2020. The module has been revised to replace TER by the TGER. The new TGER requirements include some clarifications of costs and fees that are included in the structure related costs as well as further disclosure requirements. For vehicles to be compliant with the INREV Guidelines a transition period has been put in place.
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Liquidity
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Introduction Liquidity
INREV’s objective is to ensure all investors fully understand the liquidity rights that they have when investing into a vehicle and to establish common standards of behaviour among managers and investors in non-listed real estate vehicles in the context of the exercise of liquidity rights.
The way equity (or debt investment) is subscribed to and redeemed from a vehicle has a material impact on the interests of new and existing investors. Overseeing the establishment of a fair liquidity mechanism and the disclosure of it to investors should be one of the objectives of a vehicle’s corporate governance activities. In some jurisdictions and in relation to certain vehicle structures the mechanism is prescribed by legislation or government regulations. In these cases, full disclosure of the rights, obligations and process should still be considered best practice to ensure the vehicle is suitable for the investor.
INREV recognises that non-listed real estate vehicles in Europe are set up under, and governed by, a variety of different national laws. To minimise the conflict between local legislation and the liquidity guidelines, care has been taken to limit the scope of the liquidity guidelines. INREV intends to expand the Tax and Regulations Guide to include information on liquidity mechanisms relating to open end vehicles in the various countries covered.
The importance of liquidity to individual investors varies enormously. Therefore, it is for the manager and the investors to determine at the launch of the vehicle the extent to which the vehicle should adopt these best practices. INREV expects the manager to adopt the best practices as a matter of policy and to diverge from them only with the express consent request of all the investors in a vehicle. The manager should report throughout the life of the vehicle on the level of adoption of the liquidity best practices.
Relationship with other INREV products
Given the liquidity guidelines’ focus on disclosure, there is significant overlap with other guidelines, tools and examples published by INREV. The reader is encouraged to review and to comply with the following:
- Corporate Governance guidelines;
- Reporting guidelines.
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Principles
The vehicle documentation should clearly explain the liquidity rights of the investor. The way equity (or debt investment) is subscribed to and redeemed from a vehicle has a material impact on the interests of new and existing investors. Overseeing the establishment of a fair liquidity mechanism and the disclosure of it to investors should be one of the objectives of a vehicle’s corporate governance activities. In some jurisdictions and in relation to certain vehicle structures the mechanism is prescribed by legislation or government regulations. In these cases, full disclosure of the rights, obligations and process should still be considered best practice to ensure the vehicle is suitable for the investor.
The terms and pricing of a new equity (or debt) issue should be fair to both new and existing investors. Where this is not possible and a conflict of interest exists, the manager should fully explain the issues and impact on the respective investors’ interests.
Investors should, where possible, have the right to transfer their interests in non-listed real estate vehicles without unreasonable restrictions if it does not prejudice the manager or other investors.
Constitutional documents should provide a clear legal and regulatory framework as to how such secondary transfers should be conducted.
Confidentiality arrangements in vehicle documentation should not, where possible, prevent the development of secondary market transactions.
Potential new investors ideally should have access, subject to signing a standard non-disclosure agreement, to the same information as existing investors with respect to the vehicle’s constitution, activities and performance. Additional information may be provided, subject to consent, but is not required by these guidelines.
Additional information may include, though not as a compulsory requirement:
Investors’ register (number of investors, largest investors, investors managed by the manager or external investors, etc.);
Unit issue/redemption disclosures (typically disclosed in the vehicle’s financial statements);
Any further financial disclosures, forecasts, property portfolio details, valuation information, which are not specifically required by these guidelines.
Confidentiality agreements may be appropriate for additional information and the manager should be entitled to restrict access to such detailed information if the manager believes that its release to the third party could be prejudicial to the interests of the vehicle and all its investors. Further guidance regarding confidentiality requirements can be found in 4.3.7.
Management decisions (both asset and fund management related) throughout the life of the vehicle should be mindful of the vehicle termination date.
The overriding assumption on any vehicle is that the vehicle will wind up within the length of the vehicle life as stated in the vehicle documentation. Any derogation from this assumption needs to be agreed by investors, with dissenting investors given the option to exit.
Investment managers and investors should fully engage in any consultation process and ensure communication, transparency and timeliness.
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Guidelines
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Fund documentation requirements for liquidity framework
The vehicle’s constitutional and marketing documentation should include liquidity rights of the investor and how and when to execute these rights, in both normal and exceptional circumstances, as well as detailed consideration of the exit strategy, and existing redemption arrangements.
The fund documentation should include a liquidity protocol document explaining how all investors will be treated in different liquidity events including new equity (or debt) issues, redemptions, secondary market transfers and exit. This document should be reviewed and updated throughout the life of the vehicle and made available to both existing and prospective investors.
The vehicle’s constitutional documents should include a statement of risk factors relating to liquidity. These should include as a minimum an analysis of the potential impact on the investors’ interest if the manager exercises its rights in full to either defer payment or adjust the price payable on redemption. For open end vehicles the risks associated with the vehicle not reaching the optimal size should be clearly set out, with particular reference to the impact on portfolio construction and any liquidity events.
Investment managers should ensure that all documentation relating to liquidity is fit for purpose.
Investors should ensure they fully read all relevant vehicle documentation and material provided as part of the liquidity process.
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Issues of vehicle equity (or debt investments)
Within any subscription agreement signed by investors when entering the vehicle, there should be a specific acknowledgement that they fully understand the liquidity restrictions in the fund documentation which should be written in a clear and comprehensive manner.
For open end vehicles the timing for issuance and redemption of units should reflect the independent valuation cycle for the assets. This will help to ensure that all investors are treated fairly.
Any adjustment to the basis of valuation adopted by the manager which impacts the price of subscription or redemption should be disclosed to all investors in the vehicle documentation, including the rationale for the adjustment.
The pricing mechanism for the issue of new units should, subject to local laws and regulations, be fair to all investors and be clear and unambiguous.
New issues should be based on a price determined using an up-to-date independent valuation of the underlying real estate assets and an up-to-date assessment of all other assets and liabilities of the vehicle.
Any special assumptions used by either the manager or the independent valuer should be disclosed to all parties.
The manager should maintain its anti-money laundering or “know your client” requirements for each type of investor that may subscribe to the vehicle. This should reflect the requirements of all those regulated bodies involved in the administration or management of the vehicle (including trustees, depositories and administrators).
The issue of new equity (or debt investments) into a vehicle would normally be based on either the NAV at the time or at cost with a form of equalisation payment from those investors who commit after the first close of the vehicle.
In the event that the NAV approach is used, managers should:
- identify any subscription premium that is payable and explain the approach to its calculation;
- ensure that the NAV is based on an up-to-date independent valuation of the underlying real estate assets;
- identify any special assumptions used by either the manager or the independent valuer in the calculation of NAV.
In the event that the cost plus equalisation approach is used, managers should provide a worked example to show the calculation of the equalisation amount to the incoming investor.
Related Tools & Examples |
Applied Tags |
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Redemptions of equity (or debt investments)
The manager should regularly advise investors of the redemption process, including the notice periods, redemption dates, pricing policy and timing of payments.
The manager should be required to disclose any rights it has to use discretion in setting the redemption price or the assumptions adopted by others in key components of the redemption price (e.g., property valuation). Any changes to normal practice as a result of the exercise of these rights should be communicated to investors without delay and including the rationale.
The manager should be under an obligation to disclose all its rights to defer payment of redemption proceeds. In circumstances in which such rights are exercised, the manager should communicate this to the redeeming investors without delay and provide reasons.
In the event a manager exercises its rights to either defer payment or materially amend the expected redemption price, the redeeming investors should have the right to withdraw their redemption request within a defined period.
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Secondary market transfers of equity (or debt investments)
The manager should document a policy on secondary transfers setting out which factors it will take into account when considering any transfer request. The policy should explain how fairness to all investors is achieved, including how any potential conflicts between primary and secondary issues are dealt with.
The manager should identify their anti-money laundering or “know your client” requirements for any potential investor. This should reflect the requirements of all those regulated bodies involved in the administration or management of the vehicle (including trustees, depositaries and administrators).
The manager should state within the constitutional documents if a confidentiality agreement is required for the release of information to a third party (including potential investors, placement agents and third party trading platforms) and, if so, the manager should make a standard confidentiality agreement available for the respective parties’ use at all times. A clear definition of “qualifying investor” should be incorporated into the constitutional documents identifying any specific restrictions in respect of domicile, financial strength, type of investor (e.g., any restrictions on competitors), minimum or maximum holding.
If pre-emption rights for holders are required by the founding investors, they should be drafted on the basis of a right of first refusal during a limited period from service of notice. In the event that investors choose not to exercise their rights, the selling investor should be free to sell its interest in the open market, within an agreed range of the original offer price during an agreed period.
A draft transfer agreement should be provided at launch, incorporating the minimum representations and warranties required from the relevant parties on any transfer, subject to any variations reasonably required by the manager from time to time. It is acknowledged that the final form of transfer agreement will be negotiated by all parties including the buyer, selling investor and the manager.
Investors should carefully review the constitutional documents and the liquidity protocol document or section to ensure that both documents suit their needs.
The non-executive or compliance officer, if any, should oversee the establishment of a fair pricing mechanism for the issue and redemption of units and an appropriate secondary market transaction framework.
The manager should maintain an up-to-date protocol on liquidity mechanisms for the vehicle including its policy on secondary transfers. The policy should explain what services the manager will perform in relation to any secondary transfers and any fees or expenses to be charged by the manager or the vehicle. It should also state how the manager will interact with any placement agent appointed by the selling holder and any third party trading platform.
The manager should facilitate secondary trading by its existing investors (whether the trade is executed by the manager, via a broker or otherwise) by:
- Using all reasonable endeavours to co-operate with any investor wishing to sell its interest, subject to the agreement of reasonable representations and warranties to reflect the services being undertaken in the sale by the manager and any fees agreed between the parties for those services;
- Providing regular reports to investors which contain the information set out in 9.3.7 Reporting Requirements;
- advising all holders as soon as reasonably practicable when it becomes aware of any equity (or debt investments) available on the secondary market. The manager is not obliged to release details of the seller.
If the vehicle does not have external valuations carried out at least quarterly, then the manager should be under an obligation to disclose all reasonable information required by a valuer and other financial advisers appointed by the selling investor and/or potential investors, subject to all parties entering into a confidentiality agreement restricting the use of the information. It is reasonable for a manager to refuse consent to a transfer under certain valid circumstances. These could include:
- if it is prejudicial to the tax status of the vehicle or its investors;
- if it affects the regulatory status of the vehicle;
- if, in the manager’s opinion, the proposed transferee has insufficient financial strength to meet any undrawn commitments or is unwilling or unable to provide acceptable guarantees;
- if the proposed transferee is unable to comply with all reasonable anti-money laundering requirements of the manager;
- if the proposed transferee is not a “qualifying investor” as defined.
In the event the manager becomes aware of any information which, in its opinion, renders any document or announcement materially inaccurate, incomplete or misleading or results in the failure to comply with any obligations in the constitutional documents, the manager may require the selling investor to cease distributing the offending document or announcement and/or make a correcting announcement.
The selling investor should be able to communicate with potential investors, subject to certain consents and indemnifications:
- subject to appropriate consent, be permitted to provide any potential investor introduced by an existing investor or its adviser with the information set out in the most recent annual and interim report and the SDDS. The manager should be indemnified against any claims by any third party, although it is reasonable for the existing investor to expect the manager to co-operate in the disclosure of material to assist in the verification of any marketing material that the investor produces;
- indemnify the manager in respect of any third-party costs incurred by the manager or the vehicle in facilitating any transfer request;
- indemnify the manager and the vehicle in respect of any costs arising out of any misrepresentation in respect of the vehicle in any selling documents.
The manager should take specific steps when facilitating or arranging secondary trading in the manager’s vehicle:
- inform all holders of the services that it is willing to provide for facilitating a secondary market in the vehicle and the fees charged for these services;
- publish a policy statement on secondary transfers setting out what factors it will consider when considering any transfer request. For open end vehicles the statement must explain how fairness to all investors is achieved, including how any conflicts between primary and secondary issues are dealt with. This should be readily available to existing and potential investors at all times;
- provide potential investors with reasonable access to its staff to explain the strategy of the vehicle and to arrange access to properties where appropriate subject to reimbursement of appropriate costs;
- advise the seller if any potential investor or group of potential investors would be considered unacceptable as a qualifying investor if requested to do so;
- provide a standard confidentiality agreement which it finds acceptable on request or, if appropriate, provide input into a confidentiality agreement prepared by the selling investor. The manager shall act reasonably in dictating the terms of any such agreement;
- maintain a statement of anti-money laundering requirements identifying the information required from any new investor or transferee. The statement should reflect the requirements of all those regulated bodies involved in the administration or management of the vehicle, such as trustees and administrators, to ensure that the requirements are comprehensive;
- treat all information provided to it on potential investors as confidential and not disclose it to any third party without consent unless required to do so by law;
- take all reasonable steps to ensure that the register of investors is updated without delay once in receipt of all valid documentation.
The compliance officer should oversee the activities of the manager in relation to secondary market transactions, to ensure they are in compliance with the law and constitutional terms of the vehicle.
The selling investor should:
- inform the manager of its intention to market its interest or part of its interest in the vehicle;
- prior to commencing any marketing of an interest in a vehicle, review the constitutional documents to ensure it is fully aware of its rights and obligations;
- consult with the manager on the acceptability of potential investors at an early stage;
- investigate fully any selling restrictions imposed in any jurisdiction in which it intends to sell;
- ensure that any advisers instructed to act as placement agents on its behalf are properly authorised to act in that capacity in the countries in which the selling investor intends to market its interest;
- ensure that any marketing material used for the sale of its interest and any distribution of the material is in accordance with the terms of the vehicle’s constitution and all relevant regulatory requirements;
- take all reasonable steps to restrict the marketing of its interest to “qualifying investors” as defined in the vehicle’s constitutional documents;
- in any public statements regarding the sale, make it clear that it is speaking in its capacity as an investor and its comments do not necessarily reflect the views or beliefs of the manager and other investors.
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Vehicle winding up
The manager should seek to mitigate the scale and duration of any ongoing liabilities when making management decisions towards the end of the vehicle life so that all underlying vehicle entities can be wound up as early as is reasonably possible.
The manager should keep investors advised of any ongoing liabilities once assets are sold and the impact on the timing of the ultimate winding up of the vehicle. Ongoing liabilities should be reported as a percentage of capital commitments s to each project and in aggregate.
The manager should limit the amount of capital that can be recalled by the manager once distributed to investors. The period in which the capital can be recalled should also be limited in time and clearly disclosed in vehicle documentation and reports.
The manager should keep investors regularly advised on the level of recallable capital and the manager’s expectations for its use.
Any investment restrictions imposed on a closed end vehicle should cease to apply during the liquidation phase of the vehicle.
During the vehicle wind-up process, any conflicts should be declared by the conflicted party at the earliest opportunity. If the conflict occurs because of the sales process, the investment manager should ensure an independent representative is involved, investor agreement is reached and valuations properly reflect market conditions. When a portfolio is to be sold and the investment manager potentially retained by the buyer, two deal teams should be created by the investment manager with ‘Chinese walls’ in place and senior representation on each team.
During the vehicle wind-up process, asset management and wind-up fees earned by the investment manager or involved third party should adequately reflect the amount of work involved. For example, any fixed fee asset management arrangement should be adjusted if few assets remain.
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Vehicle life extensions
The vehicle’s constitutional documents should state the rights and obligations of unit holders and the manager regarding extensions (e.g., investor approval rights and changes to management fees during an extension period).
Where the manager has discretion to extend the vehicle life, the manager should disclose in the annual and quarterly reports well in advance whether it believes such an extension will be necessary.
If the manager elects to extend the life of the vehicle, the manager should provide a clear business case, including the financial benefits to the investors expected from doing so.
Where the manager wishes to extend the vehicle term with the consent of its investors, the manager should provide the following information to all investors:
- financial analysis of the effect of liquidations now as against during a delayed period;
- full impact assessment of deferred exit (e.g., debt maturities, hedging instruments, joint venture termination provisions etc.);
- cost implications;
- revised business plan for each asset;
- confirmation of the manager’s terms of appointment (including fees) during the extension period. The presumption is that fees will be discussed for the extension period.
Investors should have the right to appoint advisors to act for them jointly at the vehicle’s cost. Appointments are to be approved by the Investment Advisory Committee (IAC) or a majority of investors if there is no IAC.
In the event the vehicle life is extended beyond the original term, best practice is for the manager’s appointment to be terminable without cause with the approval of a supermajority (usually 75%) of investors at any time after the original term.
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Reporting requirements
In quarterly and annual reports to investors, the manager should provide data on the vehicle’s equity (or debt investments) and on key risks related to liquidity:
- Provide a table showing the equity (or debt) issued, equity (or debt) redeemed, and equity (or debt) transferred during the financial year.
- State the outstanding redemption or subscription requests and outstanding lock-in restrictions as at year-end or quarter-end.
- Identify the risks to the vehicle or to the pricing of the vehicle NAV as a result of liquidity events. Liquidity events should include equity (or debt investments) inflows, redemptions and any actual or potential breaches of debt covenants.
The managers should advise all investors of the risks that any one investor, or a group of investors controlled by one decision-maker/adviser, may gain negative control over key decisions of the vehicle.
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Consultation processes for vehicle wind up or extension
If appropriate, the investment manager should provide vehicle extension proposals as soon as it becomes clear that an extension may be required, and in any event a minimum of one year prior to the original vehicle termination date.
If appropriate, the investment manager should provide appropriate notice of the decision to wind up a vehicle to investors, no later than one year before the end of the vehicle life but ideally two years.
The investment manager should provide a clear timetable for any wind-up or extension process. The timetable should be part of the vehicle documentation and include a set of procedures for the investment manager and investors to follow during the entire wind-up or extension process. Details of any information provided by the investment manager to investors should also be disclosed.
The investment manager should allow investors a minimum period of eight weeks to consider proposals prior to a formal vote.
Both investment manager and investors are obliged to ensure adequate senior management time is given to the end of vehicle life process. Managers and investors should also ensure that those involved are actively engaged in the consultation process. Where possible, an alternative senior manager (appropriately experienced) is responsible for the extension process rather than the individual investment manager.
An investor should have a consistent, documented house view of a vehicle shared by all personnel involved to avoid last minute difficulties.
At the end of the vehicle’s life, it is recommended an investor advisory committee be put in place, if it does not already exist, to participate in the wind-up or extension process.
The investment manager should be prepared to wind up the vehicle if agreement on an extension cannot be reached.
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INREV Data Delivery
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Principles
The manager should provide information requested by INREV in the context of industry data analysis and performance measurement.
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Guidelines
The manager should provide INREV with up-to-date vehicle data and financial performance data to be included in the INREV Vehicle Universe and INREV Index within eight weeks of the end of each calendar quarter.
Managers are encouraged to submit the Fund Level data of the INREV SDDS to INREV, which includes all necessary data for performance measurement plus additional data which allows for further industry comparison.
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Sustainability
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Sustainability Introduction
The major contribution that the real estate industry can make to the creation of a sustainable environment is widely recognised, and with this in mind the property investment industry has continuously increased its efforts and activities in this area in the past years. As a consequence, sustainability reporting has become a natural part of a company’s annual reports and sustainability initiatives have advanced to play an important role in the operational performance of real estate investment vehicles.
The growing interest led to the discussion of introducing mandatory reporting regulation at both country and EU level with potentially significant implications for the non-listed real estate investment sector. A recently adopted directive requires EU member states in this respect to transpose national law to enforce reporting on environmental, social and employee-related, human rights, anti-corruption and bribery matters.
These guidelines were constructed to cover similar topics, summarised under the ESG framework, and its underlying business models, outcomes and risks of these policies and therefore function as forerunner to future regulatory requirements. It is essential to successfully include sustainability into a long term strategy as well as translate that strategy into annual objectives and targets for implementation. While sustainability has long been understood as reducing the consumption of environmental resources, that definition is now being expanded to also include governance as well as social indicators. In this new context, the level of information required is increasing, so there is a need to balance the delivery of comprehensive data on the one hand but also to not become too granular.
The INREV Sustainability Reporting Guidelines have been revised to form a disclosure framework that delivers meaningful data to increase visibility and insight into a vehicle’s ESG efforts and also details their next course of action for improvements. They aim to provide a coherent framework for ESG reporting in line with annual financial reporting and present a clear picture from the vehicle’s strategy through to environmental key performance indicators.
To allow easy implementation and consistent reporting methodologies the INREV Sustainability Guidelines have been aligned with current industry standards that are widely adopted in the sector (see chapter 4 Alignment with industry standards).
References in Sustainability Reporting Guidelines:
The Sustainability Reporting Guidelines include references to other industry standards which are implemented in the non-listed real estate industry; GRESB, GRI and EPRA. The references should support fund managers employing same information to different standards and making logical links in their vehicle documentation. The references only intend to show a topical overlap, they do not refer to identical information. Therefore being compliant with the INREV Sustainability Reporting Guidelines does not automatically lead to compliance with the referenced standards and vice versa. Information that applies to the different standards needs to be processed individually. Merely referring to an attached document – such as the GRESB survey – does not fulfil the principles of the INREV Sustainability Reporting Guidelines and is not sufficient to claim compliance.
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Requirements and Best Practice Recommendations
The guidelines consist of mandatory sustainability reporting requirements and best practice recommendations. To integrate the guidelines into the INREV Guidelines Compliance Framework the mandatory requirements have been integrated into the Reporting Module.
Therewith an integrated reporting approach is provided adding ESG requirements to the obligatory INREV Guidelines Compliance Framework to reflect current market practice and create the relation between integrated reporting and sustainability reporting.
The mandatory requirements and best practices offer fund managers the ability to choose between different levels of detail and to customise the INREV Sustainability Reporting Guidelines for their own capabilities and investor needs.
While fund managers who are already familiar with ESG reporting and accordingly have ambitious goals can opt for the full set of requirements by including the best practices within the mandatory reporting requirements, those with limited resources or limited investor demands can opt for only the mandatory requirements to comply with the INREV Guidelines.
This flexibility allows vehicles to customise ESG reporting to specific investor needs. The additional guidance in the best practices has two functions: First, to be a guidance for those fund managers wanting to add more detail to their mandatory requirements to support comprehensive ESG reporting, and second to further describe the mandatory requirements and with that help understanding and interpretation of the guidelines. At the same time, the mandatory requirements result in a clear overview of the fund manager’s efforts in ESG matters, as well as their related annual goals and achievements. In addition, the best practices can provide guidance for a self-standing ESG report which can be disclosed alongside the annual reports.
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Disclosure
The mandatory requirements have to be reported on annual basis to claim compliance with the INREV Guidelines. However it is best practice to quarterly update investors with a status report.
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Vehicle long term strategy
References |
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INREV Reporting Module |
INREV DDQ |
GRESB RE 2019 |
GRI |
EPRA |
UN-PRI |
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ESG-LTS 1.1 Requirement: Describe the overall approach to setting a long term ESG strategy for the vehicle. Make reference to the overall governance approach, which is covered in the INREV Corporate Governance Guidelines. Detail the long term (2 to 10 years) ESG strategy for the vehicle. As best practice you can consider the aspects set out below: |
RG.18 |
3.8.2 - 3.8.4 |
MA1 PD1 |
G4-1 |
PR 01 |
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3.8.2 |
SE4.2 |
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NC1 |
PR 11 |
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RO3.1 |
PR 04 |
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PI1.0-PI4.1 |
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ESG-LTS 1.2 Requirement: |
RG.35 |
3.8.8 |
G4-2 |
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ESG-LTS 2.1 Best practice: |
MA1 PD1 |
G4-1 |
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3.8.5 |
ME1 |
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MA5 |
SG 08 |
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SE7-SE11.2 |
PR 12 PR 13 PR 14 |
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3.8.9 |
SE4.1 SE4.2 |
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MA4 |
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SG 09 |
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3.8.1 |
SG 09 |
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Annual objectives
This section breaks down the long term strategy described in ESG-LTS 1.1 and ESG-LTS 2.1 and translates it into a practical action plan on annual basis; including targets, investment and costs, action points. Targets should be quantified as far as possible
References |
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INREV Reporting Module |
INREV DDQ |
GRESB RE 2019 |
GRI |
EPRA |
UN-PRI |
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ESG-ANN 1.1 Requirement |
RG.27 |
RO4 RO6 |
G4-1, G4-2 |
PR 09 |
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3.8.2 |
SE4.2 |
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NC1 |
PR 11 |
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RO3.1 |
PR 04 |
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PI1.0-PI4.1 |
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BC1.1, BC1.2 BC1.1, BC1.2 |
PR 10 |
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ESG-ANN 1.2 Requirement |
RG.35 |
3.8.8 |
G4-2 |
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ESG-ANN 2.1 Best practice |
G4-1 |
PR 09 |
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3.8.5 |
ME1 |
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MA5 |
SG 08 |
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SE7-SE11.2 |
PR 12 |
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SE10.1 |
PR13 |
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SE1-SE11 SE11.1 |
PR 14 |
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3.8.9 |
SE4.1 SE4.2 |
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SG 09 |
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3.8.1 |
SG 09 |
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Annual portfolio information
In this section it should be reported against the annual targets described in ESG-ANN 1.1 and ESG-ANN 2.1. Report on the progress that has been made, on the status of initiatives and on what has been achieved.
References |
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INREV Reporting Module |
INREV DDQ |
GRESB RE 2019 |
GRI |
EPRA |
UN-PRI |
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ESG-POR 1.1 Requirement |
RG.51 |
PR 09 |
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ESG-POR 1.2 Requirement |
RG.35 |
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ESG-POR 2.1 Best practice |
PR 09 |
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Environmental data
References |
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INREV Reporting Module |
INREV DDQ |
GRESB RE 2019 |
GRI |
EPRA |
UN-PRI |
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ESG-ENV 1.1 Requirement |
RG.29 |
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PI1.0 |
G4-EN3 ff. |
Incl. in EPRA |
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PI2.0 - PI2.2 |
G4-EN1 5 ff. |
Incl. in EPRA |
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PI3.0-PI3.2 |
G4-EN8 ff. |
Incl. in EPRA |
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PI4.0-PI4.2 |
G4-EN2 2 ff. |
Incl. in EPRA |
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Intensities |
PI1.0 PI2.0 - PI2.2 |
G4-EN5 |
Incl. in EPRA |
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The environmental data should be presented in line with GRESB or GRI / EPRA methodology. Please disclose which methodology has been used. |
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ESG-ENV 2.1 Best practice |
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PI1.0 |
G4-EN3 ff. |
Incl. in EPRA |
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PI2.0 - PI2.2 |
G4-EN1 5 ff. |
Incl. in EPRA |
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PI3.0-PI3.2 |
G4-EN8 ff. |
Incl. in EPRA |
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PI4.0-PI4.2 |
G4-EN2 2 ff. |
Incl. in EPRA |
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The environmental data should be presented in line with GRESB or GRI / EPRA methodology. Please disclose which methodology has been used. |
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Alignment with industry standards
This section seeks to outline the alignment of the INREV Sustainability Reporting Guidelines with industry standards recognized to be applied in current market practice. The table below shows the references between the INREV Sustainability Reporting Guidelines, the INREV Reporting Guidelines, the INREV DDQ, the GRESB Survey and the GRI Sustainability Reporting Guidelines.
The references listed below aim to provide an indication of the alignment of the standards without any claim to comprehensiveness.
INREV Sustainability Reporting Guidelines |
INREV Reporting Guidelines |
INREV DDQ for non-listed real estate vehicles |
GRESB RE 2019 |
GRI Sustainability Reporting Guidelines* |
EPRA |
UN-PRI |
ESG-LTS 1.1 |
RG.18 |
3.8.2 - 3.8.4 |
MA1, PD1, RO3.1 PI1.0-PI4.1, SE4.2 section NC1 |
G4-1, G4-2 |
PR 01, PR 04, PR 11 |
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ESG-LTS 1.2 |
RG.35 |
3.8.8 |
G4-2 |
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ESG-LTS 2.1 |
3.8.1, 3.8.5, 3.8.9 |
MA1, MA4, PD1, PD3, ME1, SE7-SE11.2 |
G4-1, G4-2 |
PR 12 - 14 SG 08 - 09 |
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ESG-ANN 1.1 |
RG.27 |
3.8.2 |
RO3.1, RO4, RO6 PI1.0-PI4.1, BC1.1, BC1.2, SE4.2 section NC1 |
G4-1, G4-2 |
PR 04 PR 09 - 11 |
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ESG-ANN 1.2 |
RG.35 |
3.8.8 |
G4-2 |
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ESG-ANN 2.1 |
3.8.1, 3.8.5, 3.8.9 |
MA5, SE1-SE11, ME1 SE7-SE11.2 |
G4-1 |
PR 09 PR 12 - 14 SG 08 SG 09 |
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ESG-POR 1.1 |
RG.51 |
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ESG-POR 1.2 |
RG.35 |
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ESG-POR 2.1 |
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ESG-ENV 1.1 |
RG.29 |
PI1.0-PI4.1 |
G4-EN3 ff., G4-EN8 ff., G4-EN15 ff., G4-EN22 ff. |
Incl. in EPRA |
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ESG-ENV 2.1 |
PI1.0-PI4.1 |
Incl. in EPRA |
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*Please note that in addition to the above stated references, GRI defines categories and aspects in the guidelines which further outline economic, environmental and social references to their reporting disclosures which may be in line with INREV reporting requirements.
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Tools and examples
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Best Practice Example
Introduction
This report presents an example of ESG reporting in alignment with the INREV Sustainability Reporting Guidelines 2016 and aims to support the implementation of the guidelines.
The information is based on a fictional investment vehicle adduced for this example.
The report includes elements to comply with the mandatory reporting requirements as well as elements representing best practice recommendations of the INREV Sustainability Reporting Guidelines.
The mandatory Sustainability Reporting requirements are integrated into the INREV Reporting Guidelines. Claiming compliance with the INREV Reporting Guidelines therefore requires compliance with the mandatory Sustainability Reporting Requirements.
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Sustainability Reporting Requirement |
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Sustainability Reporting Best Practice |
Long Term Strategy
The Phoenix Property Fund is a balanced European based property fund covering industrial, retail and office properties.
Taking a sustainability approach is a priority for this fund. We see it as an opportunity to improve the risk-return profile of the fund as well as contribute positively from ESG standpoints while continuing to meet the fiduciary responsibilities of the fund’s investors.
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The fund has in place a long term strategy which ensures that we act on the feedback of all identified stakeholders to shape the policy, processes and methods used to manage ESG across the fund. |
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The fund sets both long term and short term targets relating to each ESG aspect identified as material for the fund, and report quarterly against targets, at asset and fund level. The fund also ensures that we have a governance structure to identify key material, sustainability aspects for the fund, review policies and processes, set targets and regularly monitor performance against annual and long term targets. |
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We measure, monitor and report on all environmental aspects of the fund, and ensure that all quantitative data is externally assured. At an asset level, we undertake sustainability due diligence during all fund acquisitions. We also ensure that all developments and refurbishments employ the best practice sustainability techniques and achieve a sustainability accreditation. |
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We recognise our responsibilities to national and European legislation requirements for ESG so we ensure compliance with all applicable ESG legislation. Through our dedicated sustainability manager, we also monitor, manage and mitigate risks due to proposed future ESG legislation. |
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To improve our expertise on this issue, the fund will ensure all staff, agents and suppliers involved in the fund management receive regular ESG related training and are incentivised through sustainability targets both in contracts and appraisal processes. |
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The fund will also play a role to encourage innovation and industry participation to further the knowledge of sustainability in the property sector. This includes building an online library system to share case studies with all stakeholders in order to promote sustainable performance of property |
Annual Targets
These annual objectives are derived from the fund’s overall ESG approach and strategy as set out in section 1. The fund seeks to meet these objectives during the next financial year with regular reports on progress through the fund’s quarterly reports, as set out in section 3.
No | Significant Aspect targeted | Measurement | Completion |
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Asset sustainability plans Ensure each managed asset has an asset sustainability plan that seeks to reduce energy, water and waste. |
Q1 | Q1 |
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Development and refurbishment Achieve an EPC of a B rating and a BREEAM excellent or Lead Gold standard for all major developments and refurbishments. |
Report | Quarterly |
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Acquisitions Ensure that all acquisitions are assessed for potential improvements to environmental performance. |
Report | Quarterly |
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Environmental targets Reduce energy and water consumption in like-for-like assets by 5% during the year. This will be achieved through various initiatives such as new lighting systems and maintenance improvements. Ensure at least 85% of waste is diverted from landfill during the year. |
Percentage reduction comparing YTD | Quarterly |
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Legislative risks Ensure all UK assets hold an EPC and that all F&G rated EPC’s have a strategy to mitigate the risks. |
Percentage F&G EPCs in the fund by NLA and ERV | Quarterly |
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Environmental Risks Ensure all managed properties hold an ISO14001 certification by the end of 2016. |
Percentage of funds covered by ISO 14001 | Quarterly |
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Employee and Supply chain targets Set sustainability targets for all employees and monitor progress by year end. Set sustainability KPIs in all new relevant suppliers let during the year. |
Targets in employee objectives, KPI’s in supplier contacts let. | Q1 Year end |
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Benchmarking Participate in the GRESB benchmarking exercise |
Complete survey by end of June | Issue results in September |
Annual Portfolio Information
Environmental Data
Example Property Fund Landlord Environmental Data Quarter 1
absolute kWh | like for like kWh | |||||
2015 | 2016 | 2015 | 2016 | % change | Notes | |
Electricity | 1,350,000 | 1,550,000 | 834,000 | 810,000 | -4% | |
Carbon | 835,940 | 969,530 | 523,215 | 508,060 | -3% | |
Fuels | 550,000 | 684,000 | 350,000 | 365,000 | 4% | Gas is degree day adjusted. Increase due to control issues at 5 Bluebird Pace. |
Water | absolute m3 | like for like kWh | ||||
2015 | 2016 | 2015 | 2016 | % change | Notes | |
9,543 | 84,500 | 5,438 | 5,980 | 5,980 | Increase in water use is due to showers being installed in two multi let offices. Hence target will not be achievable this year | |
absolute KG | % diverted from landfill | |||||
2015 | 2016 | 2015 | 2016 | Notes | ||
Waste | 1,250 | 1,800 | 74% | 94% |
- We are confident that the electricity and carbon targets for the year can still be achieved once the controls have been repaired at 5 Bluebird Place.
- The increase in water usage due to the two showers being installed at two multi-let offices, mean it will not be able to achieve our like for like water targets this year.
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Q&A
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Interpretation of references
Why do the INREV Sustainability Reporting Guidelines include references to other industry standards such as GRESB, GRI and EPRA?
These references to other industry standards are included to highlight the overlap: they are intended to support fund managers and investors in employing the same information across different standards and to help make the links in their vehicle reporting.
In order to comply with the INREV Sustainability Reporting Guidelines, is it sufficient to attach the answers to the GRESB Survey?
No, referencing to answers to the GRESB Survey alone does not mean compliance with the INREV Sustainability Reporting Guidelines. The information required by the INREV Sustainability Reporting Guidelines is more descriptive and detailed. It should however be presented in line with the GRESB, GRI or EPRA methodology.
Does compliance with the INREV Sustainability Reporting Guidelines automatically lead to compliance with the referred standards and vice versa?
No, the different standards referred to in the guidelines do not all have identical information requirements and so in order to be compliant with each standard they must each be addressed separately.. Therefore, compliance with the other standards referred to does not automatically lead to compliance with the INREV Sustainability Reporting Guidelines and vice versa.
How do I ensure the information I provide is more descriptive and detailed in order to comply with the requirements of the INREV Sustainability Reporting Guidelines?
The INREV Sustainability Reporting Guidelines require a precise description of the sustainability policies of managers and vehicles with concrete action plans at the asset level. The Guidelines have been structured to reflect a logical progression from strategy to action to practical outcomes. A long term ESG strategy, stretching from portfolio to asset level, would be expected to produce annual objectives and targets, against which practical progress can be measured, for instance in terms of energy consumption and CO2 emissions.
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Updates
November 2019: The references to the GRESB survey and UN PRI have been updated.
April 2016: Sustainability initiatives have advanced to play an important role in the operational performance of real estate investment vehicles and sustainability reporting has become a standard part of a company’s annual reports. To support this the INREV Sustainability Reporting Guidelines have been revised to increase visibility and provide insight into a vehicle’s Environmental, Social and Governance (ESG) efforts and also details their next course of action for improvements.
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Code of Tax Conduct
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Introduction to the Code of Tax Conduct
The INREV Code of Tax Conduct provides recommendations and best practices regarding tax related matters. This Code of Tax Conduct reflects an effort by INREV, together with industry specialists, to reconcile key tax standards in a set of recommendations and best practices intended to achieve a shared vision on tax matters for the non-listed real estate investment industry.
The Code was developed for the benefit of our members and other interested parties (hereafter referred to as “INREV Members”), including but not limited to non-listed real estate investment funds and vehicles, investment managers, investors and promoters, and is designed to be applied across the lifecycle of a non-listed real estate investment fund strategy.
With its recommendations and best practices, the Code of Tax Conduct aims to help INREV Members address certain tax matters internally within their organisations and externally with regard to others’ expectations and interests. These recommendations are voluntary and in case of inconsistency international, EU and domestic tax laws will necessarily prevail and override these recommendations.
As we enter a new era in international taxation, major changes in the international tax landscape are being (or have already been) implemented around the world. The main drivers for change in the past years are a new global tax environment based on a more coherent harmonisation structure, enhanced co-operation and increased transparency in tax matters. Tax is furthermore being influenced by sustainable development, including the UN Sustainable Development Goals and the EU Sustainable Finance Action Plan .
These changes also affect the non-listed real estate fund industry and have prompted new behaviours and attitudes towards tax matters in general. Contributing to a common framework for a more responsible approach to tax may better align INREV Members with broader objectives of society and support the achievement of the UN Sustainable Development Goals.
To take into account the many changes impacting tax, we recommend INREV Members reevaluate their tax approach in their own organisations and their real estate investment strategies, thereby realigning with changing expectations of stakeholders. The approach to tax can be laid down in a tax policy which takes into account the Guiding Principles of this Code of Tax Conduct. When drafting a tax policy, guidance can among others also be found in the following international guidelines and tax standards:
- The UN Investors' Recommendations on Corporate Tax Disclosure;
- OECD's Guidelines for multinational enterprises;
- OECD's Building Better Tax Control Framework; and
- The sustainability reporting standard on tax, GRI 207: Tax 2019.
The tax governance and risk management responsibility is recommended to support and contribute to the implementation of international and EU standards on AML-CFT.
Consistent with industry standards, INREV has published Guidelines on Sustainability Reporting that aim to provide a coherent framework for ESG reporting in line with annual financial reporting and present a clear picture from the vehicle’s strategy through to environmental key performance indicators. As tax is part of corporate governance, this Code of Tax Conduct is aligned with our Corporate Governance Guidelines as well as Guidelines on Sustainability Reporting.
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Presentation of the Guiding Principles
The INREV Code of Tax Conduct Guidelines designs a framework in line with industry best practices to establish and promote common and workable standards for non-listed real estate vehicles built on the following five principles.
Compliance with laws, regulations and tax obligations – The whole fund structure (from local property companies to the fund (“investment vehicle”) and its managers should always comply with the relevant laws, regulations and tax obligations applicable in the jurisdiction in which it is established or active.
Cooperation with Public Authorities – Where applicable, INREV Members should maintain a lawful and transparent relationship with public authorities based on an appropriate communication and dialogue.
Internal Governance – Investment vehicles should determine clear responsibilities with regard to tax management and compliance with the law.
Approach to tax and business rationale – The approach to tax associated with investments should be business oriented and justified by a strong business rationale/acumen.
Transparency and Disclosure towards investors and other stakeholders – INREV Members should comply with EU and/or international rules and standards regarding transparency and disclosure of information. Risks associated with the use of Non-Cooperative Jurisdictions (“NCJs”) should be considered before investing / contracting.
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Compliance with laws, regulations and tax obligations
INREV Members should comply with all tax laws, regulations and any other obligations which directly apply to INREV Members’ activities.
Compliance with tax laws and regulations involves compliance with the letter of the laws as well as the spirit of the laws and guidance as provided by public authorities. INREV Members are encouraged to seek to address any uncertainty in tax laws on a principled basis. Uncertainties might be addressed by applying for a ruling or opinion, for example.
INREV Members should comply in undertaking their activities with, inter alia:
- Making timely and correct tax payments;
- Applying all relevant tax reporting obligations (filing of tax returns, settlement of tax payments and all legal tax related reporting requirements);
- Providing information on tax obligations when tax reporting obligations fall elsewhere; and
- Applying other reporting requirements (e.g., automatic exchange of information).
Where possible INREV Members are likewise encouraged to actively weigh the effects of an indirect application of any other tax law or regulation which may apply to INREV Members’ activities. Members are also encouraged to align with the EU and other relevant legal and policy frameworks as well as the EU and other relevant processes on tax and anti-money laundering and countering the financing of terrorism (“AML-CFT”) developments. Specific attention is encouraged for:
- General or Specific domestic or European Anti-Abuse laws;
- The application of the arm’s length principle for transactions with related parties (detailed and updated as per the Organization for Economic Cooperation and Development “OECD” Transfer Pricing Guidelines);
- Anti-money laundering and countering the financing of terrorism (“AML-CFT”);
- Tax transparency regulations, including the EU Mandatory Disclosure Regime (“DAC6”) and FATCA/CRS regulations.
INREV Members are encouraged to apply relevant laws and regulations to their investment activities. Inappropriate use and/or interpretation of international public law (be it of a bilateral or multilateral character), EU Directives and Regulations, as well as domestic legislation applying to each of the concerned jurisdictions in a cross border investment is, hence, discouraged.
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Co-operation with Public Authorities
INREV Members are encouraged to co-operate with public authorities. Co-operation includes:
- a timely, constructive and transparent relay of information or documentation when officially requested by public authorities acting within their legal capacity;
- a timely, constructive and transparent response to appropriate queries officially raised by public authorities acting within their legal capacity;
- firming up compliance agreements;
- seeking active real-time audit;
- seeking clearance for significant transactions when engaging on what is perceived as being a tax risk area; and
- seeking advance tax and/or pricing agreements.
Co-operation is encouraged in any of the jurisdictions where investments are performed (and not only in INREV Members’ own country of residence).
INREV Members are encouraged to lawfully co-operate with public authorities on any reasonable tax related requests; any cooperation request which is unclear or unreasonable should be diligently addressed as means to clarify the extent and scope of any such request.
Requests properly introduced by the competent administration should be complied with in a timely manner
INREV Members are encouraged to seek co-operation from public authorities when appropriate as means to clarify or address any question regarding the application of the law (insofar as reasonable and in a fully transparent manner).
In doing so, INREV Members should principally seek to ensure an interpretative clarification from the public authorities under the terms and procedures of tax law.
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Internal Governance
INREV Members are encouraged to formalise an internal tax governance and tax risk management framework.
As such, INREV Members are expected to indicate that tax and tax policy are well embedded within their organisations and that these reflect the INREV Members’ stances or endorsements of tax conduct in general.
Tax governance and risk management responsibilities, which are recommended to operate with an appropriate level of human resources as per each Member Organization – could have the following objectives:
- Assurance of an independent assessment of tax matters within the organisation’s main decision making functions;
- Assessment and compliance with tax obligations arising from investments;
- Prevention and mitigation/elimination of tax related risks arising from the investments (either financial, reputational or other risks);
- Assurance that the tax risk profile of the organisation is consistent across investments and in line with Investor expectations;
- Definition of processes to monitor the enforcement of same principles internally and externally (towards third party service providers);
- Management and orientation of INREV Members interaction with public authorities as regards specific tax related matters;
- Management of hiring policies for third party service providers to assist the undertaking of said responsibilities; and
- Handling conflicts of interest within the vehicle.
Further guidance on this matter can be found in OECD Guidelines.
INREV Members are encouraged to regularly monitor and test the operational capacity of the tax governance and risk management responsibilities to assess the extent to which it is representative of their endorsed tax conduct and the assumed positions on tax risk.
Individuals in charge of the tax governance and risk management responsibilities should possess a senior level of experience when dealing with pan European investment tax related items (notably European, international and other relevant tax law).
INREV Members are recommended to ensure that individuals allocated to such responsibilities regularly receive on the job training as means to appropriately manage and update tax positions, as well as to meet regulatory requirements, where needed. Third party service providers could assist in the undertaking of such framework. A written protocol on how to handle conflicts of interest within the investment vehicle may be implemented.
The supervision of these responsibilities should be allocated to senior leadership and/or the Board of Managers / Directors who should prompt regular briefings on material tax issues, legislative changes and significant disputes.
Significant tax risks should also be subject to validation by the person in charge of tax governance and risk management.
The tax governance and risk management responsibility is also recommended to support and contribute to the implementation of international and EU standards on AML-CFT.
INREV Members are recommended to determine their approach towards tax and pre-define an internal tax and transfer pricing policy in light of responsible business investment strategy.
Within this approach to tax and transfer pricing, INREV Members are encouraged to:
- monitor the tax impact on any investment envisaged in a jurisdiction;
- take into account capital efficiency and regulation while structuring an investment;
- make a holistic assessment taking into account the range of possible tax outcomes; and
- follow OECD recommendations.
For the content of the tax policy, guidance can be taken from the UN investors' recommendations on corporate income tax disclosure and the GRI 207: Tax 2019 reporting standard.
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Approach to tax and business rationale
INREV Members should define tax criteria to ensure that their investment strategies are neither solely tax driven nor that they have, as one of their principal purposes, the avoidance of tax. As such, any investment strategy must consider a balancing of interests and be justified by strong business rationale, as well as being non-artificial and coherent. Furthermore, INREV Members should be able to define what type of tax approach may be considered as being solely tax driven or aggressive tax planning investment (e.g., exploitation of technicalities in a tax regime or exploitation of inconsistencies between tax regimes in order to reduce tax liability).
As part of their approach to tax, INREV Members are recommended to formulate their view on tax with respect to real estate investment strategies. The view on the tax approach in real estate investment strategies can be further detailed in concrete tax criteria that need to be tested during the entire lifecycle of a real estate investment. Tax management that is supported by overall business rationale that may prevent economic and juridical double taxation may be considered.
INREV Members are encouraged to consider risks associated with the use of Non-Cooperative Jurisdictions (hereafter “NCJs”) or any other countries that one could reasonably believe do not align with international tax cooperation standards before investing.
When operating in or through an NCJ, INREV Members are recommended to be in a position to demonstrate the business rationale or acumen and sound economic reasons thereof and provide an appropriate description of the tax regime/attributes which apply.
In addition, INREV Members should be in a position to demonstrate that they are not obtaining or bringing into the overall structure any specific tax benefit from investing through a NCJ;
When operating in or through a NCJ or low tax country, INREV Members are encouraged to:
- Evaluate the tax related risks associated thereof (financial, reputational risk);
- Formulate their views and assess the use of NCJ and/or low tax jurisdictions taking into consideration all relevant facts and circumstances.
Finally, INREV Members should:
- Closely monitor developments surrounding jurisdictions that are deemed to be NCJs in the sense outlined in TAX-12, during the course of the investments’ lifespan; and
- To enhance due diligence and monitoring on the level of transparency and integrity of such jurisdictions.
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Transparency and disclosure
While operating in jurisdictions, INREV Members and their investment managers are encouraged to conform to relevant national, EU and/or international rules and standards regarding transparency and disclosure of tax information (including voluntary disclosure), formulate their views and remain transparent on their chosen tax policy.
Where applicable and as part of full transparency, INREV Members are encouraged to report relevant information pertaining to tax in general, tax risk or tax policy to investors as appropriate, although it does not necessarily imply a full disclosure to the public.
INREV Members are recommended to document the tax policy applied during a fiscal year including investment jurisdictions where they operate.
INREV Members are also encouraged to demonstrate transparency to stakeholders by publishing their tax policy.
For the content of the tax policy report guidance could be taken from the GRI 207: Tax 2019 reporting standard.
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Glossary & references
Name | Description |
AML | Anti-Money Laundering |
AMF-CFT | Anti-Money Laundering and Countering the Financing of Terrorism |
Authorities | Public Authorities |
BEPS | Base Erosion and Profit Shifting |
Code | Code of Tax Conduct |
Compliance | Conformity with all relevant laws and regulations and spirit of such law/regulation |
EU | European Union |
GRI | GRI Sustainability Reporting Standards |
Internal Governance | Management of tax risks and due diligence on compliance with all applicable laws and regulations |
Manager | Person or group of person in charge of the management of the investment vehicle |
NCJ | Non Cooperative Jurisdiction |
OECD | Organization for Economic Co-operation and Development |
Public Authorities | Any kind of public authority in charge of laws and regulations within a jurisdiction (e.g. tax administration) |
UN | United Nations |