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INREV Guidelines
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Introduction to INREV Guidelines
INREV aims to improve transparency 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 and standardised templates for investors and investment managers 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 governance framework aligned with industry best practices and relevant to their specific needs. Investment managers should evaluate themselves, using the self assessment tool against such best practice frameworks and disclose their level of adoption.
Standardised templates
The Due Diligence Questionnaires (DDQs) and the Standard Data Delivery Sheet (SDDS) are standardised templates that complement the INREV Guidelines but they are not part of its formal structure. These are used for information exchange between industry participants.
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 the INREV Guidelines. 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 and can be found in the Global Definitions Database. 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 for investors and managers to agree 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 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 these modules.
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. Additionally, 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 mandatory to claim full compliance with the respective modules.
The INREV Guidelines Assessments have been developed to assess the level of compliance with the INREV Guidelines. 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 level of adoption and compliance with the INREV Guidelines is a matter to be discussed during the launch process of the vehicle. 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.
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 |
| Module 1. Governance | |||
| Managers should evaluate the level of adoption of INREV best practices using the Governance INREV Guidelines Assessment Tool. | Managers and investors should refer to and consider adopting INREV 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 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 governance framework. |
| Module 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. |
| Module 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. |
| Module 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 |
| Module 2. 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. |
| 2.1 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. |
| Module 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. |
| Module 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. |
| Module 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. |
| Module 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 Guidelines, INREV received a growing number of questions and comments from members and non-members regarding their interpretation, adoption and implementation. A document below describes the change procedure for updates to the INREV Guidelines.
A major revision of the INREV Guidelines is being performed during 2021-2022.
The following modules have been updated in the last two years:
Governance: Update done in January 2022 to reflect the current functions, organisations and roles within an investment vehicle, in line with the latest regulations in today’s market INREV Governance Guidelines Change Log 2022.
Performance Measurement: Updated done in January 2022 to provide clarifications of the description of assumptions and to enable a more detailed performance analysis INREV Performance Measurement Guidelines Change Log 2022.
Code of Tax Conduct: Added in January 2021
Fee and Expense Metrics: Update done in March 2020 to replace TER by the TGER
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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 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 |
|---|---|---|
| 1 | Governance | Although not described in the vehicle documentation, the INREV Governance module has been considered by the manager. The intended framework partially complies with the INREV 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 governance framework. |
| 2 | 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. |
| 2.1 | 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 guidelines. |
| 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 | 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 "INREV Guidelines Compliance Statement" from results page of the INREV Guidelines Assessments.
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Governance
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Introduction Governance
This module has been updated to reflect the current functions, organisations and roles within an investment vehicle, in line with the latest regulations in today’s market. It includes clarifications of the roles and responsibilities with an emphasis on the investment manager of the vehicle. The updated module introduces a new Sustainability principle and guidelines reflecting the responsibility towards the environment, society and other stakeholders. It also includes a new Design and operate an adequate oversight and control framework principle. At the same time, the key principles and concepts from the previous module have been retained. Finally, the updated module integrates the recent additions to the guidelines such as the Open end fund pricing best practices, and cross-references such as the new Tax Code of Conduct module.
For vehicles to be compliant with the INREV Guidelines a transition period has been put in place. Starting with reporting periods ending on or after 31 December 2022 the updated Governance module will be required to claim compliance with the INREV Guidelines. The previous version of the module can be found under Tools and Examples.
The INREV approach to good (vehicle) governance
Good governance is a cornerstone of the success of non-listed real estate vehicles. As well as defining and allocating responsibility for key decisions, good governance impacts the structure, processes, and policies that determine how a vehicle is managed and controlled. Governance frameworks work alongside and are complementary to the external legal and regulatory environment at both international and national levels. For instance, the EU’s Alternative Investment Fund Directive (AIFMD) has a significant impact in shaping the structure of management companies and their relationship with the investment vehicles they manage.
INREV's objective is to promote sound governance and to ensure that investors understand and trust the governance frameworks of the non-listed vehicles in which they invest.
The Governance module comprises both Principles and Guidelines. The Principles set out overarching objectives and obligations and are universally applicable for all participants in a vehicle. The Guidelines, which reflect best practices in the industry, provide a practical framework and set forth actionable steps to align with the meaning of the Principles.
The Guidelines provide general best practices which are applicable in most circumstances to the design, operation, and ongoing management of a vehicle. They include various specific components and examples, which guide the user as to how the Principles should be implemented in practice. The Guidelines are illustrative and should not be considered exhaustive.
At vehicle launch, the governing body of the vehicle, in collaboration with the investment manager manager and investors, should design an intended governance framework that is adapted to the respective vehicle structure and style. As part of this process, the principles and best practice guidelines included in this module should be evaluated and adopted to the extent relevant to the vehicle and referred to in the constitutional documents as appropriate.
The governing body of the vehicle, in collaboration with the investment manager, should thereafter, periodically, perform a self-assessment against the intended governance framework and take actions as appropriate. The level of adoption of the best practice guidelines and the annual score representing implementation effectiveness should be disclosed to investors in the annual report. This process is facilitated by using INREV’s self-assessment tool, the use of which is described in more detail in the Adoption and Compliance Framework of the INREV Guidelines.
Read more at INREV Adoption and Compliance Framework.
How should this module be applied?
Investment managers and the vehicles they manage are diverse in nature. They represent a wide variety of forms in terms of structure, operating models, size and complexity. Since most vehicles are managed and/or advised by an investment manager, as a practical matter, many of the governance responsibilities of the governing body of the vehicle are executed through the appointment, supervision, and oversight of the investment manager. As a consequence, many of the detailed guidelines focus on the conduct of the investment manager.
The role of independent non-executive directors, investor representatives which may form various investor advisory committees, and other parties involved in the operation of the vehicle, including investors and service providers, are also considered as part of this module. See Tools and Examples section for more information on the roles of parties involved in vehicle governance.
The diversity of investment models, risk profiles, vehicle sizes, and the different roles played by third parties mean that it would be inappropriate to be overly prescriptive when defining governance guidelines of an investment vehicle. Our objective is to provide a generic framework, which can be applied to the various types of vehicles that make up the non-listed investment universe. At the same time, specific considerations for open end and closed end vehicles as well as joint ventures and club deals, have been included.
For more detailed information on the module updates please check the Revision and Change Procedure section.
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Principles
Act lawfully and ethically
All parties involved in the operation of a vehicle should strive to meet the highest professional standards of ethics and integrity whilst complying with applicable laws. Acting ethically goes well beyond mere compliance with the law and written contracts.
Investment managers operate under a duty of care and should act ethically and with integrity towards investors and other stakeholders. Respect for the law and compliance with constitutional terms of the vehicle provide a basic framework against which the vehicle should operate. Acting ethically entails the investment manager, the governing body of the vehicle, and the other relevant actors understanding and adapting how they conduct themselves to ensure the achievement of desired long-term outcomes.
Act in the best interest of investors and consider other stakeholders
The investment manager should, in its actions, seek to maximise value for investors. Investors should clearly and actively express their expectations of the investment manager so that they can be duly considered and aligned.
The investment manager should also consider the interests of other stakeholders who transact and interact with the vehicle, such as tenants, lenders, and regulators. In addition, there are other categories of stakeholders related to the broader external environment and society that are covered under principle 7.
Identifying and understanding the interests of stakeholders will vary from vehicle to vehicle.
In its actions, the investment manager should constantly strive to achieve alignment of interests with investors, while avoiding conflicts of interest that cannot be effectively managed. Alignment of interests between the investment manager and stakeholders creates shared values, expectations, and objectives and ensures commitment to a common purpose.
When establishing an investment vehicle, main goals such as portfolio strategy, investment horizons, and risk appetite should be clearly identified and understood by all parties. Methods of alignment that are specific to the vehicle structure, such as co-investment, performance and management fee models, as well as protocols around investor consultation and decision-making, should also be considered and implemented. Effective alignment ensures that risks and rewards are appropriately allocated between investors, the investment manager, and other parties, and that investors are treated fairly as a result.
The investment manager has a general duty to act reasonably, fairly, and transparently when balancing the interests of investors. As a general rule, while taking account of the interests of each individual investor, the investment manager should, as a priority, consider the impact of any decision on the interests of all investors collectively. The application of this principle requires judgment and has an ethical dimension as it could have an adverse impact on a minority of investors.
In considering the interests of investors and other stakeholders, the investment manager should take a long-term view regardless of the investment strategy, which may vary considerably from vehicle to vehicle. The culture, strategy, and operational approach of the investment manager should support appropriate long-term outcomes.
Act with skill, care, and diligence
The investment manager should ensure that its activities related to investment vehicles are conducted prudently with diligence and care. It should also ensure that all parties involved, including its own personnel, the members of the governing body, and related service providers, behave with the highest standards of conduct and professionalism.
The investment manager should possess adequate knowledge, skills, and experience. It should constantly strive to apply best practices in arranging and supervising the business operations of the vehicle.
The investment manager should effectively engage with the governing body of the vehicle to enable it to effectively monitor its activities related to the vehicle. Acting with skill, care and diligence also means that the investment manager should refrain from engaging in any activity where it does not have or cannot secure the required expertise or capacity.
Design and operate an adequate oversight and control framework
The investment manager, in collaboration with the governing body of the vehicle, should design and operate an effective supervisory, decision-making, and control framework that adequately addresses the specific risks related to an investment vehicle. Such a framework, which extends to key service providers, needs the involvement of sufficiently qualified persons, who should possess the necessary skills and knowledge. In addition, the rights, obligations, and representation of investors, including their role in decision-making, should be clearly defined in the constitutional documents of the vehicle and respected.
Be transparent while respecting confidentiality considerations
The investment manager should be transparent and disclose information on a timely basis that is accurate, balanced, and clear. The investment manager should not only disclose information when there is a legal obligation to do so, such as when it is defined in the constitutional documents of the vehicle but should also proactively communicate and engage with investors and certain key stakeholders where the matter or information is considered relevant. At the same time, certain information regarding the vehicle and its investors that is not publicly available should be treated confidentially.
Be accountable
The investment manager, together with the governing body of the vehicle and other related service providers, should be accountable to investors for the execution of their responsibilities given their roles and functions. This implies a duty of care, acceptance of scrutiny, and a reasonable level of liability.
Be sustainable: Evaluate and manage sustainability impacts
The investment manager should consider the sustainability aspects, including impacts and risks of the vehicle resulting from its investment or other related activities. An appropriate strategy should be developed to support the management of environmental and social impacts and aspects. This sustainability strategy should be an integral component of the vehicle’s overall strategy. The investment manager should consider abstaining from making investments related to the vehicle that, on balance, are likely to adversely affect desired sustainable outcomes.
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Guidelines
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G-P01 Act lawfully and ethically
The investment manager should ensure that the vehicle complies with applicable laws and regulations.
Vehicles must comply with applicable laws and regulations. The investment manager should comply with, and act in the spirit of, (i) the applicable laws and regulations and (ii) the constitutional documents of the vehicle. The investment manager should have appropriate systems in place to monitor compliance with them.
The investment manager should behave with integrity, trustworthiness and abstain from participating in unlawful transactions.
When entering into contractual arrangements, including the drafting and implementation of the constitutional documents of the vehicle, the investment manager should ensure that outcomes intended by the investors are protected. Documentation should be clear, comprehensible and not misleading.
The investment manager should identify and formally document its core values and principles.
The core values, principles and code of ethics of the investment manager concerning how it acts toward the vehicle should be documented and communicated to investors and stakeholders. The governing body of the vehicle should oversee adherence to these values and principles. The investment manager should promote such values and principles on an ongoing basis and establish appropriate systems to enable individuals to report unethical behaviour. These systems should be designed to ensure any whistle-blower can act anonymously and without fear of reprisal.
The investment manager should develop and implement a sustainable taxation policy.
An investment vehicle should follow a tax policy in relation to its structure and day-to-day transactions. The investment manager should operate an appropriate tax management framework and, together with the governing body of the vehicle, oversee the development of an effective application of tax structures, operations and compliance frameworks. Reference is made to the INREV recommendations and best practices regarding tax related matters included in Code of Tax Conduct module.
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G-P02 Act in the best interests of investors and consider other stakeholders
The investment manager should act in the best interests of both existing and new investors that have committed undrawn capital.
When making investment decisions, the investment manager should not pursue transactions which merely optimise its own outcomes, for example through enhanced management or performance fees, but should consider the best interests and reasonable expectations of both existing and committed investors.
The constitutional documents of the vehicle should also clearly state how the interests of those investors who have committed capital but whose capital is undrawn are fairly treated.
The investment manager should set out in the constitutional documents of the vehicle the terms by which equity (or debt investments) is issued, transferred and redeemed, to ensure fair treatment of investors.
The investment manager should clearly state in the constitutional documents of the vehicle how equity (or debt investment) is issued and redeemed. In the case of closed end vehicles, the issue of equity (or debt investment) is likely to be through one initial or multiple closings where a number of investors subscribe at the same time, with distributions occurring towards the end of the vehicle’s life, as it sells its assets and winds down. Investors may have the ability to sell their investment on the secondary market but would not normally be expected to do so. The investment manager should clearly articulate the role that it provides in respect of secondary transfers, including any fees charged or interaction with third party trading platforms or placement agents.
In the case of open end vehicles, the process of issue and redemption of equity (or debt investment) would be on a periodic basis. This may be annually, quarterly, monthly or daily. The method of valuation of the equity (or debt investment) should be clearly set out, including the underlying valuation and accounting principles applied (see G09 for open end fund pricing best practices).
Read more at inrev-guidelines">Liquidity Module.
The investment manager should consider the legitimate interests of other stakeholders alongside those of investors.
When establishing a new vehicle, the investment manager should identify and understand the interests of all major stakeholders with which the vehicle transacts and interacts. These interests should be reflected in the objectives and operations of the vehicle. The investment manager should regularly evaluate relevant outcomes and communicate to investors and other stakeholders as appropriate. In addition to the investors, the following parties may, amongst others, be regarded as stakeholders:
- Employees;
- Customers and tenants;
- Lenders;
- Regulators;
- Suppliers;
- The business communities in which the investment manager and investors operate.
In addition, there are other types of stakeholders related to broader and social impacts which are considered under Principle 7.
The governing body should scrutinise any proposed changes to the vehicle, acting in the interests of all investors.
The governing body of the vehicle has a specific duty to ensure the interests of all investors are properly considered and advise on whether any proposed changes to the vehicle structure, strategy or constitution are in the best interests of all investors. The role of independent non-executive directors is particularly relevant in this context. For instance, their analysis of the merits of any proposed changes to constitutional documents or other material transactions should be supported by any reasonable resources at the expense of the vehicle, to enable them to properly fulfil this role.
Members of the governing body of the vehicle, including any independent non-executive directors, should have (i) adequate veto and approval rights on all important governance matters, (ii) access to sufficient high-quality information to make informed decisions, (see also Principle 6), (iii) the ability to convene meetings.
For open end real estate vehicles, the investment manager, together with the governing body of the vehicle, should ensure effective design, operation and governance of pricing that represents the best interests of investors.
Allocating transaction costs between different vintages of investors in open end real estate vehicles and protecting existing investors against dilution is a complex matter, subject to different circumstances and events. The investment manager should adopt a set of pricing governance best practices to drive increased transparency and to ensure pricing policies are operated effectively in the interests of investors.
Read more at fund-pricing">Open end fund pricing best practice.
The investment manager should ensure that the vehicle, through rights established in its constitutional documents, can react in a timely and appropriate way to external circumstances and significant events.
Exceptional external circumstances and significant events within the lifecycle of a vehicle should be anticipated and considered in the vehicle’s design and constitutional documents. These include exceptional economic or environmental circumstances, which may lead to a range of situations such as valuation uncertainty and breaches of covenants or liquidity issues that may require actions such as (i) deferral or suspension of trading in the vehicle’s equity, (ii) restructuring of the vehicle or (iii) liquidation of the vehicle (see G38 on communication to investors outside of the regular reporting obligations).
Procedures relating to analysis, decision- making and consent should be adequate and clearly documented. Outcomes should enable actions to be taken on a timely basis and in the best interests of investors as a whole (see G29 and G30 on material decisions requiring specific involvement or consent of the investors).
The investment manager should ensure that the liability of an investor is limited to its commitment to the vehicle.
The investment manager should ensure that the liability of an investor does not exceed its total commitment. The constitutional documents of the vehicle should contain an explicit provision dealing with such liability.
The investment manager should establish and maintain an up-to-date register of related-party transactions and potential conflicts of interest and relevant mitigating circumstances.
The investment manager, in collaboration with the governing body of the vehicle, should establish a policy to manage related-party transactions and conflicts of interest. This should be adapted to the nature and scale of the vehicle. Related-party transactions and potential conflicts of interest should be documented and reported to the governing body of the vehicle and communicated to investor representative groups as appropriate.
Related-party transactions and potential conflicts of interest may arise in different circumstances, such as but not limited to:
- The investment manager (or another vehicle/party affiliated with the investment manager) competes with the vehicle;
- The investment manager (or another vehicle/party affiliated with the investment manager) buys or sells assets from/to the vehicle or co-invests with the vehicle;
- The investment manager provides a service for secondary transfers between investors;
- The investment manager establishes contracts with related entities involved in the administration and operation of the vehicle. The allocation and arm's length nature of such fees and expenses for the contracted services are a consideration;
- The investment manager seeks to sell its interest in the vehicle or there is a material change in ownership within their organisation;
- The vehicle contracts for services with third-party service providers such as valuers and auditors that are incompatible with independence considerations.
The investment manager and its affiliates should adopt a methodology that ensures that investment opportunities are fairly allocated to the vehicle.
An investment manager may advise and provide investment opportunities to a range of vehicles with different investor bases. The investment manager should establish policies and procedures to ensure that investment opportunities are fairly allocated between such vehicles. Such an allocation approach should have appropriate oversight to ensure fair outcomes and be transparent to respective groups of investors. Different allocation methodologies may be considered, such as vintage, degree of alignment with investment strategy or a pro-rata approach.
The investment manager should consider co-investment in vehicles in which they are active.
For certain types of investment vehicles, a co-investment by the investment manager is an appropriate way to align interests with the investors. Such co-investment could consider key management and employees as well as other concerned entities. The amount and terms of such co-investment should support a meaningful alignment of interest.
The investment manager should have a policy in place defining how co- investment opportunities by investors in assets held by the vehicle are treated.
If certain investors have a contractual right to co-invest alongside a vehicle in certain assets, the investment manager should have a policy in place to define how key contractual terms, such as management and performance fees, should be allocated between the vehicle and co-investment entity to ensure that the other investors in the vehicle are fairly and transparently treated.
The investment manager should design management and performance- related fees that are aligned with the interests of investors.
Such fees should be aligned with the interests of investors and should incentivise the investment manager to behave in a manner consistent with the risk profile of the vehicle. The remuneration and fee structure of the investment manager should not encourage the investment manager, its staff or the management board members of a vehicle to act in their in interest, or to take risks that are not in keeping with the strategy and the risk appetite that has been agreed (see G33 on fee transparency).
See the inrev-guidelines">Fee and Expense Metrics module for specific guidelines on fees and costs.
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G-P03 Act with skill, care and diligence
The governing body of the vehicle, together with the investment manager, should ensure that they have the appropriate skills, capacity and competence to act effectively in the best interests of investors.
The investment manager, together with the governing body of the vehicle, has a responsibility to assess whether the people involved in the vehicle are of sufficiently good repute, and possess sufficient knowledge, skills and experience to perform their duties. They should also be able to act with independence of mind to effectively assess and challenge the decisions of the management body in its management function, and to effectively oversee and monitor management decision-making. They should be able to commit sufficient time to perform their functions with respect to the vehicle.
The members of the governing body of the vehicle and the employees of the investment manager should actively engage in their duties and make their own sound, objective, and appropriate decisions and judgments when performing their functions and responsibilities.
The diversity, equity, and inclusion (DEI) of employees and members of the governing body of the vehicle should be considered.
For more information about integrating social aspects of ESG into investment decision-making processes, please refer to INREV’s Sustainability Guidelines.
The governing body of the vehicle, supported by appropriate parties, should oversee and take responsibility for key judgments and estimates related to financial and performance reporting.
Changes in assumptions and key estimates have a significant impact on business performance and reporting. This requires setting clear expectations for transparency and quality and ensuring that the management’s judgments and estimates impacting key assumptions and the external audit processes are effective. Considerations included in the inrev-guidelines">Reporting and property-valuation#inrev-guidelines">Property Valuation modules of the INREV Guidelines should also be taken into account.
The investment manager should ensure that all parties involved in the operations and management of the vehicle are adequately trained and have access to appropriate educational programmes.
It is important that all parties involved in the operations and management of the vehicle have an understanding of its structure, business model, risk profile and governance arrangements, which should be facilitated through relevant training programmes. The investment manager should allocate sufficient resources for education and training to such persons.
Key members of the operational and management team, including the governing body of the vehicle, should have capacity and devote adequate time to effectively operate and oversee the vehicle.
This consideration is especially important for team members that are instrumental to the success and the execution of the strategy of the vehicle. The factors to take into account in this regard are, amongst others, the number of other directorships or similar management responsibilities held by such persons at the same time, and the nature and complexity of these other roles.
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G-P04 Design and operate an adequate oversight and control framework
The investment manager should document and communicate the operational, management and oversight structures related to the vehicles it manages.
The operational, management and oversight structures related to investment vehicles are often complex and involve a wide range of parties performing specific tasks. The investment manager should document and communicate the structure of the vehicle framework to potential and existing investors. This should include the identification of specific roles performed by the investment advisor, management company, administrator, custodian, external auditor and valuer, amongst others. It should also identify the existence and roles of oversight and advisory bodies, such as investment committees, management boards, valuation and pricing committees, investor representative committees and audit committees, amongst others.
The investment manager should define an appropriate risk management framework.
This should include the definition of relevant risks and risk appetite. It should also define the roles, responsibilities and controls within the risk management function. The investment manager should ensure that the process and outcomes are aligned with the investment objectives of the vehicle, aligned with the identification of key and relevant risks and adapted to the specific needs of the vehicle. The resultant risk management framework should also be designed to operate in accordance with applicable regulations, e.g., AIFMD.
A risk management framework generally consists of implementing a policy that identifies relevant risks, establishes risk limits based on the investors’ risk appetites and expectations, gathers and analyses relevant information, and responds on a timely basis.
Risk management is a continuous process that should be monitored by the investment manager and the governing body of the vehicle. The results of this process should be reported to investors, taking account of applicable regulatory and financial reporting requirements.
See the inrev-guidelines">Reporting module for specific reporting guidelines.
The investment manager, together with the governing body of the vehicle, should design and operate an effective system of internal controls.
An effective internal control framework is adapted to the specific risks, processes and organisational structure supporting an investment vehicle. It includes consideration of the operating environment of the investment manager and all relevant service providers to the vehicle. The design of an internal control environment starts with the definition of control objectives.
Based on this, effective internal controls can be designed, documented, and implemented. This should include the segregation of incompatible responsibilities and an appropriate transaction approval process that prevents an individual from acting alone or overriding internal controls. An internal control system should be tested on a recurring basis (e.g. by internal and external auditors) and the results reported to the governing body of the vehicle. Control remediation action plans to improve the environment can then be effectively directed.
The internal control framework should be aligned with legal and regulatory compliance functions and the overall risk management framework.
The investment manager, together with the governing body of the vehicle, should review the (vehicle) governance framework as part of any vehicle extension process.
Where the manager presents proposals for an extension of the life of the vehicle or a short run-off period to allow properties to be sold (which is not a fixed extension specified in the constitutional terms), this is in effect a new vehicle and provides an opportunity to review the constitutional terms of the vehicle.
The governing body of the vehicle should undertake a review of the continuing appointment or re-appointment of the external auditor, valuer, depositary and other key service providers on a regular basis.
This review should be undertaken at least every three years.
See also PV04 of the property-valuation#inrev-guidelines">Property Valuation module for guidelines on reviewing the performance of valuers.
The investment manager, together with the governing body of the vehicle, should evaluate the need for independent non-executive directors.
Given the wide range of investment vehicles and their features (open/closed end, number of investors, size, duration, risk profile, etc.), the need for independent non-executive directors varies across the industry.
For smaller vehicles, where investors may be closer to its day-to-day operation, the role and value of independent non-executive directors may be limited. For larger or more complex vehicles, it may be appropriate to appoint independent non-executive directors, which may form the majority of the governing body or occupy the chairperson role, to ensure decision-making always reflects the best interests of investors.
Where a vehicle appoints independent non-executive directors, the selection criteria should be clearly defined and focus on skills, qualifications, and relevant experience. Independent non-executive directors should at all times be independent of the investment manager and accountable to investors. The term of appointment of independent non-executive directors should be fixed, but for a period long enough for them to gain appropriate knowledge and to effectively execute their responsibility without losing their independence.
The investment manager, together with the governing body of the vehicle, should ensure that investor interests are adequately and appropriately represented.
This objective may be achieved through the constitution of various investor representative groups or committees, which generally have an advisory role in helping the investment manager and the governing body of the vehicle understand investor expectations.
Investor representative groups or committees should be able to convene meetings independently of the investment manager to enable them to exchange views or consider how to exercise their investor rights in relation to material matters.
In certain vehicles, depending on their legal structure, investors or their representative groups may need to be consulted and/or approve certain key decisions, e.g., vehicle liquidation or change of investment manager (see G30). Care should be exercised to ensure that the investors represented in these groups and committees do not gain an economic advantage over other investors.
Independent non-executive directors, where appointed, should act on behalf of all investors.
Independent non-executive directors, where appointed as members of the governing body of the vehicle, should represent the best interests of all investors, collectively. In this capacity, they play an important role in scrutinising and approving key matters that are subjective, complex, and material to the outcomes for investors (see also RG14 and RG15 of the inrev-guidelines">Reporting module).
For instance, particular areas of focus may include, but are not limited to:
- Ensuring communications and reporting to investors are clear, accurate, and transparent;
- Engaging with and reviewing reports from external auditors;
- Reviewing proposed changes to constitutional documents;
- Monitoring and approving any related- party transactions and conflicts of interest between investors and the investment manager;
- Ensuring a fair implementation of management and performance fee structures;
- Monitoring changes to pricing assumptions in open end vehicles;
- Overseeing the transition process when a manager’s mandate is terminated, either during or at the end of the vehicle lifecycle;
- Acting as a mediator between the investment manager and investors in certain circumstances, such as settling fee-related issues in the case of an investment manager termination;
- Monitoring the internal control framework of the vehicle (see G23) by, for example, receiving regular reports from, and having regular meetings with, the investment manager.
Read more at Reporting module.
The investment manager should define and communicate how certain material decisions, which include investors, are made, and how voting thresholds operate by reference to constitutional terms and local laws.
Certain material decisions (see G30), which may result in changes to the vehicle’s constitutional documents, generally require investor consent. Sufficient quantitative and qualitative information should be provided to investors to enable them to make an informed decision. Adequate time should be provided to consider this information and the proposal prior to any vote taking place.
The constitutional documents should therefore set out a practical voting process that enables the vehicle to effectively respond to circumstances.
A common approach is to require a qualified majority vote of investors. In determining which voting percentage is appropriate, consideration should be given to the individual voting power of the respective investors to establish a well- balanced voting ratio as well as any legal requirements.
The use of tacit approvals should be limited in scope and clearly described in the constitutional documents of the vehicle. If a proposed change is rejected by investors, there should be sufficient time before investors can be asked to reconsider a proposal that they have previously rejected.
The investment manager should identify and document any matters that require the specific involvement or consent of the investors.
The constitutional documents of the vehicle should clearly identify the process by which investors can exercise their rights, either through investor representative groups or committees, or by vote.
This enables investors to effectively propose and influence/control material changes related to the vehicle. Examples of such matters can include but are not limited to:
- Changes to the investment strategy, including allocation limits and use of leverage;
- Changes to valuation and financial reporting methodologies;
- Certain matters that relate to the resolution of conflicts of interest with related parties;
- Matters related to the appointment and operations of the investment manager, including key persons;
- Appointment of the members of the governing body of the vehicle and its external auditors;
- Liquidating or extending the life of the vehicle.
- Other material changes to the constitutional terms of the vehicle.
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G-P05 Be transparent while respecting confidentiality considerations
The governing body of the vehicle should ensure that reporting to, and communication with investors is balanced and fairly represents the activities of the vehicle.
The governing body of the vehicle has an obligation, including applicable regulatory and legal obligations, to ensure that all forms of reporting by the vehicle to its investors are appropriate in the circumstances. In pursuing this responsibility, the governing body of the vehicle should always consider the best interests of investors.
The investment manager should ensure the constitutional documents set out clear obligations of confidentiality assumed by the vehicle and its investors.
The investment manager is aware of information relating to the vehicle, some of which will be disclosed to investors, either through regular reporting obligations or on an ad-hoc basis. Information that is commercially sensitive to the vehicle, should be treated as confidential and investors should refrain from acting on it. The constitutional terms of the vehicle should contain appropriate undertakings to ensure confidentiality of such commercially sensitive information.
The need to maintain confidentiality should be balanced by the need to ensure transparency; if there is a conflict, the need for transparency should prevail. Confidentiality provisions should not effectively prohibit investors exercising their rights under the constitutional documents, such as when engaging third- party advisors.
An investor may also be required to share confidential information related to the vehicle with a third party. In such a case, the investor should provide a notice to such third parties that such disclosure is made in confidence and should be kept in confidence. The investor remains responsible and accountable for the compliance of the third party to whom confidential information is disclosed.
The investment manager should ensure the constitutional documents of the vehicle include a clear and accurate description of the management and performance fee structures.
Management and performance fee structures, whilst being a key tool to align interests, (see G16), are often based on complex mathematical formulas which are subject to interpretation. The constitutional documents of the vehicle should clearly describe in detail how such fees are calculated over time. Best practice would be to include worked examples to ensure that subjective interpretation is limited.
The investment manager should also describe in detail the services to which the fees relate. For instance, there should be a clear distinction between a management fee and other charges and activities related to the administration of the vehicle, commonly conducted by third parties.
Where the investment manager has the right to make certain amendments to the constitutional documents of the vehicle without investor approval or through a power of attorney, such changes should be fully communicated and disclosed to investors.
If the investment manager has the right to amend certain elements of the constitutional documents of the vehicle, it should proactively communicate to investors the purpose and the intended results of any proposed changes and provide the amended documents on a timely basis. The constitutional documents of the vehicle should clearly describe the scope of such rights. (see G29 on voting thresholds).
The investment manager should disclose the existence and terms of side letters entered into with investors.
There may be circumstances in which different investors will have different arrangements, financial or otherwise, with a vehicle. For example, larger investors may receive a discount on fees payable to the investment manager and have the right to be represented in investor advisory groups. The investment manager should disclose how side letters and similar individual investor agreements are negotiated and implemented. The manager should also disclose the scope and terms of such side letters from a vehicle-wide perspective.
Investors should provide the investment manager on a timely basis with information legitimately required by the investment manager, such as for tax compliance purposes and anti-money laundering procedures.
Investors should respond in a timely manner to legitimate requests by the investment manager or service providers related to the vehicle to enable them to comply with certain legal or regulatory requirements such as tax compliance and anti-money laundering obligations. In addition, investors should provide other legitimate, non-statutory information, such as that related to conflicts of interest that they may have with the vehicle.
The investment manager should clearly define the annual and interim reporting requirements towards investors in the constitutional documents of the vehicle.
In accordance with INREV’s Reporting Guidelines, the constitutional documents of the vehicle should define the content and timing of investor reporting.
The investment manager should disclose relevant information periodically in a clear and concise manner under internationally accepted reporting standards and alongside the audited annual financial statements.
The annual report should describe the governance framework defined in the constitutional documents of the vehicle in accordance with applicable regulations (see also RG14 of the Reporting module).
The annual report should also include information such as the risk framework of the vehicle, its portfolio strategy and objectives, its sustainability strategy, and the economic outlook. It should further describe how the investment manager has complied with its business objectives and policies.
Read more at Reporting module.
In addition to respecting the contractual reporting obligations of the vehicle, the investment manager should provide further clear, timely and accurate information to investors and/ or key stakeholders, as relevant.
During the lifecycle of a vehicle, there may be situations or unforeseen events that the investment manager understands to be material to the outcomes of investors, which warrant timely and clear communication to investors outside of the regular reporting obligations. The investment manager, together with the governing body of the vehicle, should enable such communications to take place through appropriate channels such as written reports and/or convening meetings. The information communicated should be relevant and reliable.
The investment manager and the governing body of the vehicle should enable potential investors to fully utilise the INREV Due Diligence Questionnaire (DDQ) when considering an investment opportunity.
The INREV DDQ provides a consistent due diligence framework, helping potential investors achieve a high level of scrutiny when entering a vehicle. The investment manager should consider the adoption of the INREV DDQ and answer all its questions appropriately and in a clear and precise manner.
The investment manager, in collaboration with the governing body of the vehicle, should clearly state in the constitutional documents the vehicle’s intended level of adoption of the INREV (Vehicle) Governance Guidelines and perform an annual self-assessment of the effectiveness of its intended implementation.
To enable investors to fully understand the nature and extent of compliance of the vehicle’s intended governance framework with the INREV Guidelines, an initial as well as ongoing annual self-assessment by the governing body of the vehicle should be performed and the results disclosed appropriately.
See also RG16 and RG17 of the Reporting module.
The investment manager should ensure that the constitutional terms of the vehicle enable it to comply with INREV’s data collection requirements.
The investment manager should describe in the constitutional documents of the vehicle the type, frequency and purpose of information that will be provided to INREV. The investment manager should use reasonable efforts to ensure timely and accurate submission of such information and data required by INREV in the context of industry data analysis and performance measurement.
Read more at INREV Data Delivery module.
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G-P06 Be accountable
The investment manager, together with the governing body of the vehicle, should demonstrate how they are actively engaged with and accountable to investors.
The investment manager and the governing body of the vehicle are accountable to the investors of the vehicle as a whole. Demonstration of this accountability could include, for example, being available upon reasonable notice, defining the specific role of independent non-executive directors towards investors where applicable and meeting investors and investor representative groups to review and discuss matters relating to the vehicle.
The investment manager and the governing body of the vehicle are also expected to maintain relations with and oversee the work of external advisers and service providers, including external auditors, valuers, portfolio and property managers and risk managers.
The investment manager and the governing body of the vehicle should be willing to accept a certain level of liability subject to reasonable indemnifications.
There should be a fair allocation of risk between the investment manager, the governing body of the vehicle and the investors. The extent of the liability should be in accordance with the relevant laws and regulations and described in the constitutional documents of the vehicle. At the same time, the investment manager and the governing body of the vehicle can expect to be indemnified by the vehicle for losses, except in cases of fraud and culpable behaviours such as wilful misconduct or gross negligence.
The investment manager should enable investors to perform compliance audits, where appropriate.
Investors should have the right, in appropriate circumstances, to request an inspection of the books and records of the vehicle or have a third-party auditor conduct an audit.
Where multiple investors acting together through investor representative groups or committees, or the governing body of the vehicle, request and agree on an independent audit, the cost should be borne by the vehicle.
The investment manager should ensure that the constitutional documents of the vehicle include clear provisions for the rights and obligations of all relevant parties involved in the removal of the investment manager and the early termination of the vehicle.
The constitutional documents may provide that the investors, through the governing body of the vehicle, have the right to replace the investment manager. This may occur in a range of situations which include but are not limited to key changes of control in the investment manager organisation, un-resolvable performance issues or conflicts of interest.
For cause removal: Vehicles should have a ‘removal for cause’ clause in place that gives investors, dependent on a defined threshold, the right to call at any time for a vote to remove the investment manager. The vehicle documentation should clearly describe how cause can be established. The documentation should clearly disclose the investment manager’s rights regarding management fees and reasonable expenses, including consideration of the transition period in such situations.
No fault removal: The constitutional documents of the vehicle should contain a removal at will or ‘no fault removal’ clause, whereby the manager’s mandate can be terminated due to the request of a majority or qualified majority of investors (see G29). The documentation should clearly disclose the investment manager’s rights regarding management fees and reasonable expenses, including consideration of the transition period in such situations.
Termination of the vehicle: The constitutional documents of the vehicle should provide the right for investors to terminate and dissolve the vehicle in certain circumstances. This decision is generally subject to a qualified majority vote of investors. The documentation should clearly disclose the manager’s rights regarding management fees and reasonable expenses, including consideration of the transition period in such situations.
For specific guidelines related to the wind up of a vehicle, see the inrev-guidelines">Liquidity module.
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G-P07 Be sustainable: Evaluate and manage sustainability impacts
The investment manager, together with the governing body of the vehicle, should consider and develop a strategy to address sustainability impacts.
The investment manager should identify material sustainability aspects, including impacts and risks, and develop a sustainability strategy, with clear and measurable goals, to mitigate environmental concerns and consider social impact, as appropriate to the overall strategy of the vehicle. This may include, among others, sustainability requirements of the real estate assets the vehicle may invest in, and any additional ESG investment criteria. The investment manager should regularly report to investors on how the relevant ESG factors of the investments made have been addressed.
The investment manager should consider abstaining from making investments related to the vehicle that, on balance, are likely to adversely affect desired sustainable outcomes.
The investment manager, together with the governing body of the vehicle, should establish a framework which defines how the vehicle will act as a ‘responsible owner’ of real estate assets.
The investment manager should act as a responsible owner by engaging with tenants, property companies, and other stakeholders related to the vehicle and developing programmes and policies that seek to improve the social and environmental performance of the real estate assets held by the vehicle. These programmes should be aligned with the overall sustainability strategy of the vehicle, as appropriate. Considerations driving the development of such programmes could include, among others, property types and uses, and cooperation, and forms of engagement with tenants and community interests. The investment manager should clearly describe the sustainability criteria, targets, and the expected impact of such programmes.
The investment manager, together with the governing body of the vehicle, should implement INREV’s Guidelines on sustainability, as appropriate.
The INREV sustainability best practice recommendations aim to provide a coherent framework for sustainability reporting in line with annual financial reporting and present a clear picture from the vehicle’s strategy through environmental key performance indicators.
The investment manager should adopt INREV’s Guidelines, as appropriate, when including sustainability in a long-term strategy and translating it into objectives and annual targets for implementation.
More information on the areas to be considered will be included in the new Sustainability module (end of 2022 release).
For more information on sustainability reporting guidelines see the Reporting module of the INREV Guidelines.
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Further guidance and interpretation
Club deals and joint ventures
In this section, we deal with variations in the application of the (Vehicle) Governance Guidelines to club deals and joint ventures. In practice, there can be many forms of regulated and unregulated vehicles including a range of separate accounts with single investors, club deals with a limited number of investors, and joint ventures where investors share control. In these situations, contractual arrangements, and in particular management and performance fees, tend to be very specific and customised to the circumstances and to the parties involved.
Control over investments
Investors participating in club deals and joint ventures are usually seeking greater control over the strategy and activities of the vehicle. They generally set more focused investment strategies and seek greater control of investment decisions. In addition to the matters set out in G30 of the Guidelines normally reserved for investors, investors are therefore likely to want to control the other matters such as the timing of acquisition and disposal of real estate assets.
The role of independent non-executive directors in club deals and joint ventures
In circumstances where a small number of investors are actively involved in the running of a vehicle, it would be expected that investors who participate in club deals and joint ventures would have the personnel resources to engage fully in the activities of the vehicle, without creating any management inefficiencies, such as delay in ratifying decisions. In these circumstances, the role of the independent non-executive directors may not be relevant.
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Tools and examples
The Corporate Governance assessment relates to the previous version of the Corporate Governance module. The assessment for the 2022 version will be available soon.
Related Tools & Examples |
Applied Tags |
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Q&A
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Compliance of AIFM
As well as complying with general Governance guidelines, what additional factors should the Board of an investment vehicle defined as an Alternative Investment Fund (AIF) consider when appointing and monitoring a regulated Alternative Investment Fund Manager (AIFM)?
Most large real estate investment vehicles need to be managed by regulated managers or AIFMs. Although INREV’s guidelines apply equally to regulated and unregulated managers, there are additional specific considerations concerning regulated managers in order to comply with the applicable regulation. This scenario may typically occur where an AIF within the scope of the AIFMD appoints an external AIFM as its manager. In this case, there are a number of important activities which the Board of the AIF delegates to the manager, but which it must monitor in order to ensure that the AIFM is performing such tasks reasonably and in compliance with legal and regulatory requirements.
Important tasks delegated to the AIFM must include portfolio management and risk management and will often also include administration and marketing. The AIFM may also, for example, provide support to the Board of the AIF in the performance of its duties. In addition, the AIFM commonly identifies and manages key service provider relationships on behalf of the AIF, such as depositories and auditors, and under the AIFMD has a responsibility to manage the valuation of the AIF’s assets and liabilities on behalf of the AIF to which it has been appointed. Clearly, the Board of the AIF has to be comfortable with the competencies and performance of the AIFM and will normally perform a degree of due diligence on the AIFM pursuant to this goal.
There are two key elements to this due diligence role:
- Initial due diligence
- Ongoing due diligence
Both initial and ongoing due diligence should be documented.
Initial due diligence
Before appointing an AIFM, the Board of the AIF should perform initial due diligence. The initial due diligence should, among other things, assess the ability of the proposed AIFM to perform the tasks to be delegated to it, and its ability to comply with the requirements of the AIFMD.
One of the key indicators for the Board of the AIF will be authorisation and supervision by the relevant supervisory authorities. Other typical factors which the Board of the AIF may consider may include:
- Scope of activities and experience of the AIFM;
- Knowledge, skills, experience and reputation of the Board, senior management and key staff, including the portfolio manager and risk manager;
- Organisation of the AIFM, including human and technical infrastructure, and the control arrangements of the risk management, compliance and internal audit functions;
- Delegation arrangements, and ability of the AIFM to perform adequate due diligence and ongoing monitoring;
- The identity and nature of the shareholders of the AIFM;
- Values statement or code of conduct, and how they are implemented in practice;
- Segregation of risk and portfolio management functions;
- Independence of the internal/external valuer.
From a practical perspective, the AIFM could provide the Board of the AIF with part or all of its application for authorisation to the supervisory authorities, and/or its handbook describing its organisational structure, policies and procedures, to assist the Board of the AIF in its assessment of the ability of the AIFM to comply with the requirements of the AIFMD.
Ongoing due diligence
The Board of the AIF should perform ongoing due diligence to assess whether the AIFM continues to have the ability to perform the tasks which have been delegated to it and to comply with AIFMD requirements. From an ongoing compliance perspective, the AIFM should provide the Board of the AIF with one or more reports covering:
- Risk management, including, among other items, KPIs on compliance with the risk limits and the risk profile of the AIF as disclosed to investors;
- Compliance with the regulatory requirements, including in particular KPIs on the compliance of the AIF;
- Internal audit reports, providing, among other items, an evaluation on whether risk management, control, and governance systems are functioning as intended.
Typically, each of these reports would be AIF-specific. In each case, the report should also cover remedial action to correct any deficiencies identified in the current or previous reports. The Board of the AIF should receive these reports at a frequency which is appropriate to the activities of the AIF, and at least annually.
In addition, when the AIF is appointing key service providers such as auditors and depositories, or providing representations to them, and when approving reports and accounts of the AIF, they are relying on the output of many of the key functions of the AIFM. Such reliance may be formally constituted in the form of reports and representations from the AIFM to the AIF.
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Confidentiality
How is confidentiality considered in the INREV Governance module and how to respond to the conflict between protecting sensitive information about your investors and being transparent?
The INREV standards refer to confidentiality in certain key areas:
- The Governance Module: principle number 5 refers to confidentiality in the context of transparency.
- The INREV Due Diligence Questionnaires (DDQs) refer to confidentiality in the assessment process.
- INREV provides a standard Non-Disclosure Agreement (NDA) with the purpose of providing a standardised alternative to the wide variety of NDAs currently being used in the industry.
The Governance Module is built upon seven principles. Principle 5 refers to being transparent while respecting confidentiality considerations. In general, it promotes free information flow between all involved parties in an investment vehicle to enable investors to understand the performance of the vehicle and its compliance with the vehicle strategy. The best practices in the module go as far as to disclose the terms of side letter agreements to all investors to create full transparency among all investors.
At the same time, Principle 5 also stresses the need for confidentiality. These provisions are mainly focused on the treatment of commercially sensitive information such as the identity of individual investors or information which would be advantageous to competitors. This information should be kept confidential and not made publicly available.
As referred to in the Governance guidelines, the general provisions covering confidentiality requirements and information to be disclosed to investors should be included in the constitutional documents. However, a significant amount of practical judgment needs to be applied during the lifetime of the investment vehicle to balance the information needs of investors whilst protecting the confidentiality requirements of both investors and the investment managers.
Given the wide variety of investment vehicle types, investment strategies, number and nature of investments it is difficult to be prescriptive on how to strike the right balance between transparency and confidentiality. There are many potential situations in the lifecycle of a vehicle that need to be considered when applying these basic principles. These may include but are not limited to:
- The risk that investors acquire commercially sensitive information from a specific vehicle and use this information inappropriately in other transactions or relationships;
- Investors wishing to waive the right to anonymity in order to collaborate with other investors;
- Investment managers using the identity and information regarding the position of existing investors in a vehicle to inappropriately promote their own interests;
- Investment managers entering into agreements with individual investors outside the normal terms of the vehicle, which modify the relevant investors engagement in the vehicle (side letters) without the knowledge of other investors;
- The risk that investment managers inappropriately withhold information about key events that impact the performance of an investment vehicle on the grounds of confidentiality;
- The risk that investment managers inappropriately use confidential information about a specific investment vehicle to promote interests in other non-related investment vehicles managed by the same investment manager;
- The risk that potential investors do not disclose all relevant information in relation to their qualification for admission to an investment vehicle (minimum net worth tests, tax position, etc).
In exercising practical judgment, investment managers and investors should always prioritise transparency over confidentiality while putting the best interests of all investors in the vehicle first and respecting the relevant constitutional terms.
In order to promote understanding and protect the confidentiality requirements of the parties involved, non-disclosure agreements are commonly used in the industry. To facilitate and standardise this understanding between the parties, INREV provides a non-disclosure agreement (NDA) template. For example, this may be used when providing information to potential new investors looking to buy interests in the vehicle through primary or secondary trades (INREV Liquidity Guidelines).
In addition, the INREV DDQs also include specific questions to help investors understand the scope of confidentiality requirements the manager and investors need to comply with regarding the disclosure of certain information about the vehicle and interests in it.
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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
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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
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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 |
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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 |
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Full year-end audited financial statements should be provided to investors. These should contain:
SDDS references: |
Annual |
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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 |
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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 |
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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 |
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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
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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 |
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Contact details of the vehicle. SDDS references: |
Annual |
Interim Describe material changes |
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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 |
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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 |
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Present a short, high level summary of the vehicle strategy. SDDS references: |
Annual |
Interim Describe material changes |
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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 |
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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
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Annual and interim reports should disclose any changes to the capital structure of the vehicle. |
Annual |
Interim Describe material changes |
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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 |
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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 |
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Disclose and discuss details of share class NAVs (accounting NAVs, trading NAVs, INREV NAVs as applicable) and variances since prior period-end. |
Annual |
Interim |
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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 |
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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
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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 | |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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Discuss the current period performance in the context of the track record of the vehicle (for instance, over the last five years). |
Annual |
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Describe all significant subsequent events affecting the vehicle since the period-end and comment on their impact on vehicle performance if relevant. |
Annual | Interim |
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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 |
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Describe the impact of potential or implemented regulatory changes that affect or may affect the vehicle’s operations and performance. |
Annual | |
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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
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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 |
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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 |
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For interim reports, show a summary of the portfolio allocation by sector and geography. SDDS references: |
Interim |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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Discuss the developments of property yields, including yields by sector and geography. SDDS references: |
Annual |
Interim Describe material changes |
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Discuss the developments of other key property information by sector and geography, when relevant. |
Annual |
Interim Describe material changes |
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Identify and comment on rental concentration risk (either by expected rental value or actual rental value). |
Annual |
Interim Describe material changes |
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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 |
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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 |
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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 |
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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 |
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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 |
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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
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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
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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 |
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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 |
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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 |
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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
This module has been updated to provide clarifications of the description of assumptions and to enable a more detailed performance analysis. The updated module introduces a methodology for asset-level return calculation in line with the INREV Asset Level Index. In addition, gross of fee performance calculations were added to assess the impact and complexity of fee models.
For vehicles to be compliant with the INREV Guidelines a transition period has been put in place. Starting with reporting periods ending on or after 31 December 2022 the updated Performance Measurement module will be required to claim compliance with the INREV Guidelines. The previous version of the module can be found under Tools and Examples.
The purpose of the Performance Measurement module of the INREV Guidelines is to provide support to investment managers when computing and reporting historic performance measures, both at a vehicle and asset level. These guidelines have been designed primarily for direct property vehicles.
The guidelines aim to increase consistency in the reporting of performance to investors. The standardisation involved will also improve the relevance of indices, such as the INREV Indices, which may potentially be used as points of reference. Comparing the performance of a vehicle and of assets can add insight into the overall vehicle performance. The point of reference should relate to vehicles with similar investment mandates, objectives, or strategies.
The Performance Measurement module includes concepts that are consistent with the Global Investment Performance Standards (GIPS) issued by the CFA Institute and the NCREIF PREA Reporting Standards. Although the frameworks are different, the intention is to align the approaches and avoid conflicts in the methodologies.
This module has been developed in light of existing practice in the European non-listed real estate industry. It includes a list of required and recommended performance measures. If an investment manager chooses to disclose the recommended performance measures, the related computation and disclosure requirements should be followed to claim compliance with this module. Performance metrics that are recommended may be disclosed on a voluntary basis. The non-disclosure of such metrics would not trigger non-compliance with the Performance Measurement module.
Investment managers should evaluate the level of compliance with the requirements included in the guidelines. A self-assessment should be performed periodically. The level of compliance and the annual score representing compliance effectiveness should be disclosed to investors in the annual report. This process is facilitated by using INREV’s self-assessment tool, the use of which is described in more detail in the Adoption and Compliance Framework of the INREV Guidelines.
Read more at INREV Adoption and Compliance Framework.
Performance measures and the level of disclosures may vary depending on the style of the vehicle. The level of discretion of an investment manager in determining the cash flows of a vehicle and investment restrictions vary significantly depending on the vehicle type. Some performance measures may not be appropriate for some vehicles. For instance, investment managers of closed end vehicles have discretion over capital calls and distributions, while investment managers of open end 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 end vehicles whereas time-weighted returns are more relevant for open end vehicles.
This module includes several new metrics as presented in the following summary table:
For more detailed information on the module updates please check the Revision and Change Procedure section.
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Principles
Performance measures of a vehicle or an asset should fairly represent the performance of that vehicle or that asset. They should be reliable and consistently computed and presented, to enable investors to understand and compare the performance of the vehicle or the asset.
Performance measurement should reflect the performance of the vehicle in the context of its style, type, structure, and strategy.
Performance measurement of an asset should take into consideration the vehicle performance context.
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Guidelines
Vehicle documentation should include the required performance measures disclosed by the investment manager and the frequency of disclosure to investors.
Investment managers should disclose the computed performance measures and methodology used. If the investment manager chooses to use a formula that is not in line with the proposed methodology set out in this module, this should be fully disclosed and explained.
Investment managers should disclose any significant assumptions used to compute the performance measures and their components. The use of the INREV NAV is encouraged. When the INREV NAV is not used and adjustments are made to the vehicle NAV, these should be properly disclosed.
Presentation of the vehicle and asset level performance should be accompanied by adequate disclosures. The purpose of such disclosures is to provide present and potential investors with a precise and complete picture of the vehicle’s historic performance, having due regard to applicable regulatory requirements, e.g. MiFID II, as appropriate to the vehicle.
Performance measures of a vehicle should be calculated at the same frequency as the published NAV valuation of the vehicle, with annual being the minimum frequency.
It is expected that the investments held by a vehicle are measured at fair value, whatever GAAP is used by the investment manager to determine the NAV of the vehicle.
Periods for which a vehicle does not perform valuations can still be used to provide a data point, as long as an NAV is determined. For instance, a vehicle may provide quarterly NAVs, but only annual property valuations. In interim periods the NAV would reflect all changes to the balance sheet while holding the value of the property portfolio constant.
Some measures required in the guidelines may be less relevant during the investment/ disinvestment period. However, investment managers are still required to provide the measures included in this module. Investment managers may provide comments alongside the measures to explain that they may be distorted since the vehicle is in its investment/ disinvestment period
Performance measures at the asset level should be calculated at the same frequency as the property valuation.
Vehicle level performance measures should be computed in the vehicle currency in order to reflect the true performance of the vehicle. Asset level performance measures should be computed on a currency-neutral basis. Nevertheless, the group of assets performance measures should be determined using the vehicle currency, either on a currency-neutral basis or taking into account the currency effect.
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3.1 Vehicle Level Performance Measures
Time-weighted returns (TWR) are the preferred performance measures to use when an investment manager does not have control over the cash flows of the investment. This is typically seen in open end vehicles and non-discretionary single-client account portfolios. The Modified-Dietz Method is used to calculate TWRs throughout the financial industry.
In closed end vehicles, the investment manager has control over the drawdown of capital into the vehicle and the eventual distribution of capital and profits back to investors. Therefore, TWR may be less useful for presenting performance for such vehicles. In this context, TWR may be disclosed but it is not a required element for closed end vehicles.
A total vehicle level return on a time-weighted basis should be disclosed in the annual report. This measure should be provided for a one, three, five, and ten year period (where the track record exists) and since inception, on an annualised basis.
When a return for longer than or equal to one year is annualised, it is also allowed to account for the exact number of days.
Investment managers may also disclose a total vehicle level return gross of fees by using the above formulae computations and excluding fees, as appropriate.
A total vehicle level return net of fees is computed as follows:
TwdC = Time weighted (daily) contributions for the measurement period
TwdR = Time weighted (daily) redemptions for the measurement period
TwdD = Time weighted (daily) distributions for the measurement period
A total vehicle level return gross of fees is computed as follows:
TwdC = Time weighted (daily) contributions for the measurement period
TwdR = Time weighted (daily) redemptions for the measurement period
TwdD = Time weighted (daily) distributions for the measurement period
The fees to be considered are all the fees charged by the investment manager at all levels of the vehicle structure. See Fee and Expense Metrics module for the definition and description of fees typically charged to a vehicle.
When fees are charged on distributions, the investment manager should be careful at not double counting those fees into the return computation. When fees are amortised, the amortised portion should be taken into account in the vehicle return gross of fees.
See the inrev-guidelines">Fee and Expense Metrics module for specific guidelines on fees and costs.
Annualisation is computed as follows:
where there is a return that is for longer than one year, but not a full year period (e.g., one year and two months)
For full years the formula is as follows:
ARp = Annualised return for the measurement period p
Rp = Return for the measurement period p (non-annualised)
DHP = Number of days in the measurement period
y = number of full year periods
A vehicle level income return should be disclosed. This measure should be provided for a one, three, five, and ten year period (where a track record exists) and since inception, on an annualised basis.
Net investment income is a measure of the net operational income of a vehicle, on an accrual basis, comprising the income and costs described below. It is intended to provide a measure of operating activity, exclusive of capital transactions or movements in the reported period, excluding valuation gains or losses on assets and liabilities, transaction costs, sale proceeds and taxes on capital profits and losses, and other replacement costs that can be capitalised if in accordance with GAAP. Rental income is recognised when it is contractually billable to tenants (i.e., straight-lining of rents is not applicable when real estate is reported at fair value). Certain expenses may be based on the investment vehicle’s unrealised change in net asset value, including, for example, incentive management fees, and are recognised as a component of the unrealised gain or loss.
An income return is computed as follows:
TwdR = Time weighted (daily) redemptions for the measurement period
TwdD = Time weighted (daily) distributions for the measurement period
The main components of net investment income are:
Rental and other income from direct investments and indirect investments (being the net investment income equivalent of a vehicle’s interest/holding in another vehicle):
- Rental revenue from (direct and indirect) real estate investments
- Interest income
- Distributions, dividend income
- Other income from other real estate investments
Vehicle costs:
- Audit costs
- Interest income
- Bank charges
- Custodian costs
- Dead deal costs (charged by third party)
- Transaction-based management fees
- Transfer agent costs
- Valuation costs
- Vehicle administration costs
- Vehicle formation costs (amortisation for the period)
- Debt arrangement costs
- Transaction based property service costs
- Other professional service costs
- Other/miscellaneous vehicle costs
- Financing costs
Vehicle fees:
- Asset management fees
- Fund management fees
- Wind-up fees
- Debt arrangement fees
Property costs:
- External leasing commissions
- Property insurance costs
- Property management costs
- Utilities, repair and maintenance costs
- Other/miscellaneous/sundry costs
- Acquisition fees
- Internal leasing commissions
- Property management fees
Taxation expenses:
- Corporation tax
- Income tax
- Non-resident landlord tax
- Other taxes based on gross profit
- Net wealth tax
- Deferred tax
- VAT or other sales tax (only recoverable portion)
- Withholding tax
- Capital gain taxes
A vehicle level capital return should be disclosed. This measure should be provided for a one, three, five, and ten year period (where a track record exists) and since inception, on an annualised basis.
When component returns (both net and gross of fees) are presented for any period, the sum of the income return and capital return will generally equal the total return. When component returns are geometrically linked to create cumulative returns, the simple addition of the cumulative income return plus the cumulative capital return will not usually equal the cumulative total return. The difference is acceptable and no adjustment is further required.
INREV’s method for dealing with this inconsistency is to calculate the returns as explained. The total return is correct and the income and capital returns are approximations.
The difference between the returns net and gross of fees do represent the time-weighted impact of fees on the returns of the vehicle.
A capital return is computed as follows:
A distributed income return should be disclosed.
Distributed income is defined as the amount of investment income derived from operations that is distributed to investors or credited to investors in the case of investment vehicle dividends or income reinvestment programs that are elected by the investor.
Distributed income does not include the return of capital or principal, the distribution of realised gains from asset sales (capital gains) or proceeds from financing activities. The objective is to present the actual cash distributions that are derived from customary and ongoing investment management operations without the distortions related to disposition and refinancing activities.
Distributions include dividends and interest paid during the period.
Distributed income return is computed as follows:
A vehicle level since inception Internal Rate of Return (SI-IRR) should be disclosed.
Inception IRR is the IRR of the vehicle after all vehicle-level fees, taxes and carried interest are deducted.
The SI-IRR represents the rate of return based on the present value of all of the appropriate cash inflows associated with an investment, with the sum of the present value of all the appropriate cash outflows accruing from it and the present value of the unrealised residual portfolio over the holding period.
SI-IRRs are commonly used to measure the performance of the investment (contrasted with TWRs, which are used to measure performance that can be indicative of investment manager performance). The SI- IRR is also known as the rate of return that results in a net present value of zero.
The SI-IRR formula discounts flows F1 through Fn back to F0 where: F0 is the original investment; and F1 through Fn are the net cash flows for each applicable period. If the entity has not yet been liquidated, the ending cash flow, Fn, will consist of the latest period’s operating cash flows plus an estimate of the net residual value.
SI-IRR at vehicle level net of fees, is computed as follows:
f0 … fn = cash flow for the period 0 through n (Negative values for inflows and positive values for outflows)
IRR = Internal Rate of return
SI-IRR at vehicle level gross of fees, is computed as follows:
where f’ is cash flow before the deduction of all the fees charged by the investment manager at all levels of the vehicle structure as detailed in the Fee and Expense Metrics module. Typically, fees are added back similarly to distributions to investors, so f’ = f + MF.
In cases where the fee is added on a date other than that of the distribution, or in cases where the fee is paid from outside the account, the same formula can be applied, in which case f’ = f + FM. In the case of accrued fees, the accrual as of time period n should be added from the final net residual market value at f’n.
MF = Management fees (including performance fees)
Multiples
Multiples are shown as ratios, with one financial input in the numerator and another in the denominator, both of which are typically presented for the entire life of the investment rather than some discrete time period (month, quarter, etc.). Used in conjunction with time-weighted returns and IRRs, multiples provide greater transparency when analysing performance. The four commonly used multiples are presented below (PM09 - PM12).
A paid-in capital multiple or paid-in capital to committed capital multiple (PIC) should be disclosed.
This ratio gives information regarding how much of the total commitments have been drawn down. The paid-in capital is the cumulative drawdown amount, or the aggregate amount of committed capital actually transferred to a vehicle. Typically, a number such as 0.80 means that 80% of the vehicle’s capital commitments have been drawn from investors.
PIC is computed as follows:
PIC
CC
PIC (paid-in capital) = Cumulative capital contributed to the vehicle CC (committed capital)
Vehicle CC = Cumulative capital plus undrawn capital.
An investment multiple or total value to paid-in capital multiple (TVPI) should be disclosed.
The TVPI, total value to paid-in capital multiple, also known as the investment multiple, gives users information regarding the value of the investment relative to its cost basis, not taking into consideration the time invested. As an example, a multiple equal to 1.50 is typically read to mean that the investors have 1.50 units of value in the vehicle for every unit invested.
TVPI is computed as follows:
TV
PIC
TV (Total value) = Sum of residual vehicle net assets (NAV) plus aggregate vehicle distributions
PIC (Paid in capital) = cumulative capital contributed to the vehicle
Realisation multiple or cumulative distributions to paid-in capital multiple (DPI) should be disclosed.
DPI represents the amount of capital and income returned or repaid to investors, divided by a vehicle’s capital calls at the valuation date. DPI reflects the realised, cash- on-cash returns generated by its investments at the valuation date. It is most prominent once the vehicle starts exiting investments, particularly towards the end of its life.
As the vehicle matures, the DPI will typically increase. When the DPI is the equivalent of one, the vehicle has broken even. Consequently, a DPI of greater than one suggests the vehicle has generated profit to the investors.
DPI is computed as follows:
D
PIC
D = Distributions
PIC (paid-in capital) = cumulative capital contributed to the vehicle
Distributions retained in the vehicle and not paid to the investors are considered as realised.
An unrealised multiple or residual value to paid-in capital multiple (RVPI) should be disclosed.
This ratio provides a measure of how much of the return is unrealised. As the vehicle matures, the RVPI will increase to a peak and then decrease as the vehicle eventually liquidates to a residual fair value of zero. At that point, the entire return of the vehicle has been distributed. Residual value is defined as the remaining equity in the vehicle or asset.
An RVPI of 0.70 would indicate that an amount equal to 70% of the vehicle’s paid-in capital remains unrealised.
RVPI is computed as follows:
RV
PIC
RV (residual value) = Net asset value (NAV) of the vehicle
PIC (paid in capital) = cumulative capital contributed to the vehicle
The following items should be disclosed alongside the performance measures:
- The date to which the performance measures have been calculated;
- The currency used to express the performance measure;
- Whether fees are to be deducted to reach the net performance;
- The accounting standards applied; and
- The methodology for determining the date of cash flows.
Disclosures may also include explanations for restrictions on cash flows, such as distributions that are restricted and affected by regulations.
Points of reference with the same vintage year or inception year should be disclosed if available and meaningful.
Given the limited universe of vehicles in several markets, it may not be appropriate to use available main- or sub-real estate vehicle indices as points of reference. An investment manager should take reasonable care not to apply points of reference where the investment manager or vehicle in question accounts for a significant share of the underlying universe. When no appropriate point of reference exists, this must be disclosed. Where there is a difference between the performance objective and the point of reference (such as the fund style as defined by INREV), the objective may be used as a primary reference point as long as clearly disclosed.
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3.2 Further Guidance and Interpretation
The following considerations and methodologies are to be used when determining performance measures:
Unitised basis versus NAV basis
In some countries, the performance of vehicles may be reported at a unit level. The Guidelines have been developed on the basis that performance has been determined on an aggregate NAV and cash flow basis.
Dates of cash flows
Dates used for performance calculations should be based on the dates of cash flows between investors and the vehicle as determined for accounting purposes. As a minimum, annual cash flows should be used, but it is now common to use higher frequencies such as quarterly, monthly or daily cash flows, especially for open end vehicles. For capital calls, the deadline of the capital call should be used.
Open end vehicles are subject to potentially constant in- and out-flows of capital. To accommodate for the large flows of capital, cash flows can be rolled up periodically, ideally on a monthly basis to the end of each month.
In the case of distributions for unitised vehicles, the declared date should be used. Closed end vehicles should apply the dates where cash flows are called or distributed to investors. The date should reflect the effective date for capital calls when the capital should be paid in and for distributions when the capital was paid out by the vehicle.
Fees
Performance measures are computed net of all fees and any materialised carried interest (or any other kind of performance fee) and forecasted future (provisions for) carried interest payments.
However, fees charged to investors as a result of the redemption of units or exit of the investors should not be considered when they are earned by the investment managers rather than the vehicle. Even though not required, performance measures may also be computed gross of management fees and carried interest payments.
When fees are charged to investors outside the vehicle, performance measures should include these fees as if the fees had been billed directly to/inside the vehicle.
Composites
To illustrate the combined performance of multiple vehicles, composite performance may be presented, combining the performance of each vehicle in a standardised way over time.
Investment managers may consult other industry performance guidelines such as GIPS for further guidance on composites.
Grouping criteria
The term ‘grouping’ is used to describe the process of aggregating/disaggregating two or more vehicles to evaluate performance using the time-weighted return.
To ensure fair representation of composite performance, vehicles included in the same composite must share one or more common attributes.
Composites should be defined by common attributes. A suggested hierarchy of grouping criteria is provided below:
- Style (please refer to the INREV Style classification paper, not investment manager defined);
- Structure (open vs closed end);
- Strategy;
- Points of reference; and
- Leverage
For closed end vehicles, composite performance should preferably be defined by the combination of vintage year and one of the above-mentioned attributes.
Further considerations for multiple computations
Some vehicles have the ability to recycle capital during the investment period (to reinvest returned equity capital). For equity multiples calculation purposes, any distributions that are included as a return of equity or return on equity for the purpose of the calculation (‘nominator’) should, if reinvested (recycled), also be added to the amount of drawn capital (‘denominator’) to give a fair reflection of the true ratio of returned equity to investors. This should be the case whether the recycled equity is
actually, distributed and recalled, or reinvested directly by the investment manager without physically distributing back to investors (to eliminate the back-and-forth flow of cash).
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3.3 Asset Level Performance Measures
Asset level returns on a time-weighted basis reflect the performance of an operating asset or a group of assets. The asset level return relates strictly to asset operations and attempts to strip out all structure-related activity, usually including advisory fees, use of working capital and income and expenses. As such, asset level returns on a time-weighted basis reflect the appreciation and operating income that are generated by the asset.
Asset level returns should be reported on an unleveraged basis, as not all assets are leveraged and those that are, are leveraged within the vehicle structure, which makes the comparison of leveraged returns among different assets difficult.
A total return at an aggregate asset level may be disclosed.
The asset level, unleveraged return formulas are as follows:
TR = Asset total return
MV = Market value at the end of the period
D = Dispositions, net of disposal costs
A = Acquisitions, including acquisition costs
p = Period
k = Asset
Denominator (unleveraged):
When component returns are presented for any period, the sum of the income return and capital return will generally equal the total return. When component returns are geometrically linked to create cumulative returns, the simple addition of the cumulative income return plus the cumulative capital return will not usually equal the cumulative total return. The difference is acceptable, and no adjustment is required to any of the total return components.
For the estimation of an asset’s monthly market values, the following approach is proposed:
INREV's proposal
Value change adjustment:
E [MVkm] = Estimated market value at the end of the month
MVkQ = Market value at the end of the quarter
D = Dispositions
A = Acquisitions
Q = Quarter
k = Asset
Acquisitions costs
The asset level return should reflect the investment manager experience and not that of the investor and therefore the acquisition costs should not be capitalised or amortised for asset level return computation purposes. The acquisition costs should be expensed.
Under the fair value model, acquisition expenses for an investment property are effectively charged to income when fair value is calculated at the first subsequent measurement date after acquisition. This results in the fair value of a property on subsequent fair value measurement being lower than the total purchase price of the property.
For INREV NAV calculation purposes, the capitalisation and the amortisation of the property acquisition cost over the first five years after the acquisition of the property should be used.
Saving on Stamp Duties
Should the positive effect of saving on Stamp Duties as a result of a share deal sale of a property be taken into account when calculating the performance of the asset?
When determining the market value of a property, the valuer should take into account any saving on Stamp Duties and the positive effect of these savings. The valuer should make the same allowance for transaction costs that a normal purchaser of the property would make in the market, regardless of the exit strategy.
Tax roll-up
The valuation should be done at the asset level (valuation of the building) regardless of the SPV. The roll-up of income taxation within the SPV should be captured at the vehicle level.
An income return at an aggregate asset level may be disclosed.
IR = Asset income return
MV = Market value at the end of the period
A = Acquisitions
p = Period
k = Asset
Net operating income numerator (unleveraged):
The net operating income (NOI) numerator is the net operating income (before interest expenses) that was reported by the asset during the period. Vehicle or investment level income and expenses should be excluded from NOI because the asset level returns focus on asset operations.
Estimation of asset’s monthly NOI and CAPEX
When CAPEX and NOI are collected over a quarter period, to estimate the monthly values, the following two options are possible.
1.Equally distribute quarterly NOI and CAPEX to the months based on the number of days an asset is owned during the month
2. Allow contributors provide monthly NOI and CAPEX for more precise performance calculation
A capital return at an aggregate asset level may be disclosed.
CR = Asset capital return
MV = Market value at the end of the period
D = Dispositions
A = Acquisitions
p = Period
k = Asset
Capital return numerator (unleveraged):
The appreciation numerator measures the change in asset value (increase or decrease) not caused by capital improvements or sales.
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Tools and Examples
The assessment for the 2022 version of the Performance Measurement module is now available.
To help you with the transition towards the updated Performance Measurement guidelines, here are a few practical examples that may be useful.
Related Tools & Examples |
Applied Tags |
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Q&A
When fees are amortised over a certain period of time in the NAV used for performance measure computation (e.g. acquisition fees amortised over five years in the INREV NAV, debt arrangement fees amortised over the duration of the loan in the INREV NAV), how should these be taken into account in the vehicle level returns gross of fees?
The management fees reversed in the formula presented in the module to compute the total vehicle level return gross of fees should be the amortised portion of these fees during the period under consideration.
When performance fees take the form of carried interest accrued during the period, are such incentives taken into account into the fees reversed during the period?
Yes. All fees impacting the income statement of a vehicle in accordance with IFRS should be taken into account in the total return computations (gross and net of fees).
What is the treatment of fee rebates when calculating performance measures?
Fee reductions, fee waivers, and transaction offsets recognised in the financial statements of the vehicle, should be included in the return computation and in the gross of fees performance measures.
Fee reductions, fee waivers, and transaction offsets not recognised in the financial statements of the vehicle are excluded from the performance measures and may be disclosed if permitted.
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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 | |
|---|---|
| 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 |
|---|---|---|---|---|---|
| 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 |
|||||||
|---|---|---|---|---|---|---|---|
| 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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Treatment of Debt arrangement fees and costs
For INREV NAV calculation purposes, capitalised debt arrangement fees and costs should not be considered when the fair value of the loan is compared with the carrying amount at balance sheet date. This is because the debt arrangement fees and costs are netted with the related financial instrument.
The fair value of the financial liability should be compared with the long- and short-term part of the principal amount still open at balance sheet date, also referred to as the nominal value of the financial instrument.
Rationale
Based on various technical questions and debates from within the INREV community on this topic, INREV notes that practitioners use different approaches regarding the treatment of debt arrangement fees and costs for the following INREV NAV adjustment j) Revaluation to fair value of financial assets and financial liabilities.
Background
Under IFRS, financial liabilities within the scope of IFRS 9 are measured at:
- Financial liabilities at fair value through profit or loss
- Financial liabilities at amortised cost.
Financial liabilities are generally classified and measured at amortised cost, unless they meet the criteria for classification at fair value through profit or loss.
In this Q&A, we initially focus on financial liabilities measured at amortised cost and then on financial liabilities at fair value through profit or loss.
Initial measurement at initial recognition: an entity shall measure a financial liability at its fair value plus or minus, in the case of a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the issue of the financial liability.
Debt arrangement expenses includes fees and commission paid to agents (including employees acting as selling agents), advisers, brokers and dealers, levies by regulatory agencies and security exchanges, and transfer taxes and duties. Debt arrangement expenses do not include debt premiums or discounts, or internal administrative or holding costs.
Reference is made to the INREV Global Definitions Database (GDD) in respect to debt arrangement costs and debt arrangement fees.
In the amortised cost approach after initial recognition, the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation, using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance.
The effective interest method that is used in the calculation of the amortised cost of a financial asset or a financial liability and in the allocation and recognition of the interest revenue or interest expense in profit or loss over the relevant period.
When applying the effective interest method, an entity generally amortises any fees, points paid or received, transaction costs and other premiums or discounts that are included in the calculation of the effective interest rate over the expected life of the financial instrument.
Treatment of capitalised debt arrangement expenses
Based on these assumptions, when the debt position is accounted for at amortised cost, the debt arrangement expenses remaining to be amortised should be considered.
INREV NAV should be adjusted for the spreading of costs that will benefit different generations of investors. The assessment on how to consider the capitalised debt arrangement expenses in the INREV NAV should be based on this principle.
Under IFRS, when applying the effective interest method, an entity generally amortises any fees and transaction costs that are included in the calculation of the effective interest rate over the expected life of the financial instrument. Therefore, the treatment for the capitalised debt arrangement expenses under IFRS is already in line with the INREV NAV principle of spreading one-off costs over time to benefit different generations of investors.
Example
|
Debt accounted for at amortised cost |
|
|
Original principal amount |
€ 100 million |
|
Fixed interest |
8% |
|
Current market fixed interest |
6% |
|
Remaining term |
5 years |
|
Capitalised debt arrangement cost at balance sheet date |
€3 million |
|
Remaining principal amount at balance sheet date (after previous repayments) |
€ 80 million |
|
Carrying amount at balance sheet date |
€ 77 million |
|
Fair value of the debt at balance sheet date |
€ 90 million |
Calculation of the adjustment:
As previously indicated, the capitalised debt arrangement cost should not be taken into account when the fair value of the loan is compared with the carrying amount at balance sheet date.
| Items | Amount (€ M) |
| Fair value of the loan | 90 |
| Remaining principle amount | 80 |
| To be adjusted amount | (10) |
As the current market fixed interest is lower than the actual fixed rate, the fair value is more than the remaining principal amount. As a result, the INREV NAV adjustment is a negative adjustment of € 10 million.
Accounting of financial liability at fair value
Under IFRS 9, debt instruments under certain circumstances can be measured at fair value through Profit and Loss. However, the accounting of debt instruments at fair value is not a common approach.
All financial instruments are initially measured at fair value plus or minus transaction costs. As a result, for financial liability at fair value through profit or loss, the debt arrangement fees and costs are not capitalised and directly expensed in Profit and Loss.
In this model, the debt arrangement fees and costs are directly expensed and a reversal is expected to bring the accounting of the debt arrangement cost in line with the effective interest method.
Therefore, a calculation should be made to determine the amount of unamortised debt arrangement fees and costs and if an effective interest method be used. This unamortised part should be positively corrected in the NAV to bring it in line with the accounting principles.
As the debt is already accounted for at fair value, no adjustment to bring the debt to fair value is expected for this debt category, except for the unamortised debt arrangement fees and costs.
Local GAAP
If local GAAP prescribe other accounting treatments on the debt arrangement costs, an assessment should be made how the debt arrangement cost should have been accounted for under the effective interest method. An adjustment should be made to bring the position of these debt arrangement cost in line.
Depending on the accounting treatment (expensed, booked through equity or capitalised with different amortisation methodology), the adjustment should include the proper accounting of the spreading of the debt arrangement cost.
Straight-lined instead of effective interest
If a financial statement preparer from a materiality perspective did not properly account for the amortisation of debt arrangement expenses in line with the effective interest method (e.g. straight-lined over the term of the debt), it is expected from a materiality perspective when preparing the INREV NAV that the same reasoning/approach would be acceptable.
For debt arrangement cost that are expensed and expected to be reversed for INREV NAV, this practical expedient could be used. The debt arrangement cost could be amortised on a straight-lined basis if it is to be expected that the effective interest method would not lead to a material difference in the INREV NAV.
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Forward purchase recognition
How is forward purchase recognised in INREV NAV?
Definition:
Forward purchase: A contractual arrangement between an investment vehicle and a developer to develop a real asset (irrespective of whether or not the land is owned or leased by the investment vehicle) at a determined price with delivery in the future.
Forward funding: A subset of forward purchase, forward funding is a specific contractual agreement with a developer where the investment vehicle will finance the development from start to completion with the end goal of contributing the real asset to the investment vehicle.
Financing arrangements without an automatic transfer of the real asset (once construction is completed) to the investment vehicle are not seen as a forward purchase.
The actual transfer of the real asset can have different forms such as a direct contribution of the real asset to the investment vehicle or an indirect contribution via a transfer of ownership rights of an entity that owns the real asset.
Assessment for inclusion into INREV NAV:
INREV NAV reflects 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.
Based on this principle, after certain criteria are met (for instance more than 50% probability of completion of the development), the more accurate economic value of a forward purchase should be taken into consideration in the calculation of INREV NAV, also in cases where under IFRS or other GAAP no assets are accounted for at balance sheet date.
Forward purchase arrangements can take various legal forms under different terms and conditions. For assessing whether a forward purchase arrangement should be accounted for, at fair value, when calculating an INREV NAV, three main aspects should be considered by the investment manager:
- Legal rights to purchase the real asset once construction is completed;
- Probability to start the development project and complete it according to plan;
- Determining a reliable fair value for the investment property under construction (reference is made to IVS/ RICS, and the Property Valuation module of the INREV Guidelines).
In instances where the land and respective development are recognized as an asset in the vehicle’s financial statements throughout the development stage, no additional adjustment may be required when calculating an INREV NAV. If the land and respective development are recognized as a financial instrument or prepayment in the vehicle’s financial statements, or in cases where recognition of the real estate asset occurs at completion (when it is contributed to the fund balance sheet), additional adjustments should be considered when calculating an INREV NAV.
Irrespective of the legal contracts and forms, an assessment should be made by the investment manager as to whether the actual terms and conditions of their particular forward purchase arrangement apply to the considerations included in this Q&A.
Where to reflect forward purchase adjustments into the INREV NAV?
There is currently no specific INREV NAV adjustment line for forward purchase arrangements.
The investment manager should include any additional adjustments related to Forward Purchase arrangements in the calculation of INREV NAV under the INREV NAV adjustment N) Contractual fees.
Contractual arrangements may not meet the criteria for recognition as an asset, provision or liability in accordance with IFRS / other GAAP at reporting date. The adjustment will then represent the impact on NAV of the revaluation of contractual arrangements to 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.
For more detailed information on the module updates please check the Revision and Change Procedure section.
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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) |
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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 |
|---|---|---|---|---|---|
| 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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Treatment of Debt arrangement fees and costs
For the Total Global Expense Ratio (TGER), vehicle expenses are classified into Vehicle Fees and Vehicle Costs. As a result, the Debt Arrangement Fees charged by the investment manager for services rendered in arranging debt financing are allocated to the Vehicle Fees category. The Debt Arrangement Costs paid to a lender, broker, or other third party are allocated to the Vehicle Costs category.
As indicated in the INREV NAV and the INREV GAV Q&As, all debt arrangement fees and costs are accounted for at amortised cost and these costs are then charged via amortisation to Profit and Loss over the term of the loan.
A parallel should also be made to the Property Acquisition Fee and the Property Acquisition Cost, as their amortisation for the period/year is included in the calculation of TGER.
It follows that for both Debt Arrangement Fees and Costs, the amortisation for the period/year should be included in the calculation of TGER.
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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
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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
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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.
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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
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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.
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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 |
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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 |
|
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 |
|
Acquisitions Ensure that all acquisitions are assessed for potential improvements to environmental performance. |
Report | Quarterly |
|
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 |
|
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 |
|
Environmental Risks Ensure all managed properties hold an ISO14001 certification by the end of 2016. |
Percentage of funds covered by ISO 14001 | Quarterly |
|
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 |
|
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 |