REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC 2015 PROFESSIONAL STANDARDS

Transcription

1 REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC 2015 PROFESSIONAL STANDARDS

2 FOREWORD Welcome to the third annual Review of Investor Reporting Trends and best practices published between PwC and ANREV. This report aims to provide fund managers and investors with insights into the trends in investor reporting practices in Asia-Pacific and to enable benchmarking of current reporting practices across different geographic regions and fund strategies. Further to last year s review, the reappointment of PwC in Europe to conduct the equivalent INREV survey has enabled us to also compare directly with INREV members reporting practices. The 2015 review is the first year where Asia-Pacific managers have had a chance to fully incorporate the requirements of the updated INREV Guidelines, which were issued in final form during April 2014 ( This year s review therefore builds on the 2014 review, which served in some ways as a dry run, giving managers the chance to benchmark themselves against the latest best practices. It has been very pleasing to see the efforts put in by many managers on updating their reporting, and the overall improvements in compliance levels across the region. During the study, we reviewed the annual, quarterly and ad-hoc investor reporting submitted by 47 non-listed real estate funds, and compared them to self-reviews conducted by the managers using the complance checklist, and the detailed reporting requirements of the INREV Guidelines. The results were then compared and benchmarked to peers within strategies and overall. Private feedback, through interviews and calls, was given to the 28 participating fund managers. In addition to this, discussions were held with relevant stakeholders and service providers active in the region, including several investors, valuers, and sustainability professionals, in seeking their perspectives on reporting advances, difficulties, and where reporting practices should be heading. Please refer to Appendix 1 for details of the framework and approach adopted for this study. Throughout the publication, with the exception of one case study, the views of interviewees and/or survey respondents are presented as direct quotations, but without attribution. On behalf of PwC and ANREV, we would like to extend our sincere thanks to all who shared their valuable time and expertise during this project. We trust that all participants received useful feedback from the exercise, which will assist them in adoption of the INREV Guidelines and their ongoing investor relations. We look forward to meeting them again as we conduct the next year s review. Paul Walters Asia-Pacific Real Estate Assurance Leader PricewaterhouseCoopers Limited Amélie Delaunay Director, Research and Professional Standards ANREV

3 REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC 2015 TABLE OF CONTENTS EXECUTIVE SUMMARY 01 1 THROUGH THE LOOKING GLASS 04 PERSPECTIVES ON THE EVOLUTION IN REPORTING PRACTICES IN ASIA-PACIFIC 2 UNDER THE MICROSCOPE 09 COMPLIANCE WITH THE REPORTING MODULE Of THE 2014 INREV GUIDELINES 3 SNAPSHOT 37 ENVIRONMENTAL, SOCIAL, GOVERNANCE AND INVESTOR REPORTING 4 TAKING THE VIEW IN 41 CONCLUSIONS AND NEXT STEPS APPENDIX 1 REVIEW FRAMEWORK AND APPROACH 43 APPENDIX 2 DETAILED COMPLIANCE RESULTS 48 SPONSORING ORGANISATIONS 49

4 01 EXECUTIVE SUMMARY OBJECTIVE OF THE REVIEW The objective of this review is to provide an update on current market practices in investor reporting within the non-listed real estate fund industry, and in particular to what extent investor reporting complies with the revised INREV Guidelines (the Guidelines ) issued early last year. The Guidelines, which are based on best practices and investor reporting requirements in Europe, can be a differentiator for fund managers when they are launching new funds. In addition to this, with a view to make them more broadly adopted within the region, we hope that by sharing feedback from Asia-Pacific fund managers, investors, and service providers, we are able to provide valuable input to INREV and ANREV as they continue refining the Guidelines, including their stratification by relevant fund styles (i.e. core, value-added, and opportunity). DEVELOPMENT OF THE GUIDELINES CHART 1 INREV GUIDELINES: THEN, NOW, AND GOING FORWARD 2012: Old INREV Guidelines in effect April 2014: New INREV Guidelines launched Dec 2013: White Paper for New Guidelines released July 2015: INREV, ANREV, NCREIF and PREA officially signed an agreement to create global standards With the Guidelines coming into effect in April 2014, last year s review process was treated as an opportunity to raise awareness of the Guidelines, specifically on Module 2 Reporting. Fund managers have been hugely supportive of being given the chance to discuss the process of implementing these Guidelines in Asia-Pacific markets, in understanding how some of their peers have approached it, and how they have handled any difficulties. Fund managers that participated in both last year s and this year s review stated that last year s feedback played a big part in persuading them to update their reporting for this year s reporting cycle, by showing gaps in compliance with the new and updated guidelines. This has enabled managers to make an educated decision on whether they wish to update their investor reporting on not only new fund launches, but also existing funds. This has been borne out by the overall or headline compliance levels across the region markedly rising.

5 REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC Going forward, we expect the Guidelines project to increase in scope, as we move towards Global Guidelines. In 2014, INREV, ANREV NCREIF and PREA executed a Memorandum of Understanding to jointly collaborate with a goal to converge reporting standards globally. This development will help investors and fund managers to better understand regional differences and is a notable step towards the development of a set of globally consistent market practices. Global taskforce groups have started work on various aspects of the Guidelines with representation from North American, Asian and European industry players, including feedback gained from interviews conducted as part of this survey. It is worth noting that this is a longterm initiative and that it will take some time to get alignment since each region is used to different investor reporting practices. FEEDBACK FROM FUND MANAGERS As set out in Appendix 1, as part of the 2015 review, private feedback, through interviews and calls, was given to the 28 participating fund managers, covering all 47 respondent funds. The importance with which investor reporting, and compliance with the best practices embodied by the INREV Guidelines is viewed by fund managers around the region, was demonstrated by the seniority of management attending these sessions. Having discussed these revised Guidelines with managers around the region last year, the groundwork for their adoption in the 2014 reporting cycle was laid out, as well as the associated ability to benchmark fund reporting compliance in With this growing awareness and adoption of the Guidelines, the scope of discussions with fund managers this year has tended to focus on the finer points, such as the depth and content of commentary now required to supplement the existing quantitative disclosures. During the interviews, we again sought feedback to provide to INREV for the ongoing development of the Guidelines. While in the past feedback from many managers centered on the need to slice and dice Guidelines by investment strategy, this year the themes were more diverse, ranging from the development of sustainability guidelines, to the global alignment of the Standard Data Delivery Sheet (SDDS), as well as greater alignment with US investor reporting requirements. As real estate funds in Asia-Pacific continue to grow, such perspectives as previously menitoned, would provide valuable input when best practices are being refined by applicable INREV and Global working groups, to suit regional and global needs. For fund managers, having established a reasonable balance within their fund s core reporting to investors, for many the correspondence has turned into a conversation, and like most conversations it has moved to be more real-time. The key take-away for most fund managers from these conversations is that investor expectations and discussions have branched out from the core financial reporting aspects into areas such as information security and management as well as environmental, social, and governance (ESG) analysis, both of which we will expand upon in this report. To keep up with changing and varied expectations, fund managers need to keep up their conversations with investors, as they strive to meet their needs.

6 03 PERFORMANCE Overall As anticipated in last year s report, compliance is growing back towards the levels established with the old Guidelines, with overall or headline compliance moving up from 57% last year to 68% this year. As part of this year s review, in order to reflect the broader range of reporting mediums adopted, we have enhanced the scoring process to incorporate the communication of reporting-related information, such as standing information that is readily accessible to investors via mediums such as web portals. Having adjusted for such factors, the overall compliance rises further still to 72%. We would anticipate that the compliance levels would continue to rise in the coming 2-3 years as reporting is renewed for new funds raised. ASIA-PACIFIC TABLE 1 ANALYSIS BY REGION AND STRUCTURE Section of Guidelines/Region & Structure Asia-Pacific Open Closed Number of funds Fund documentation for reporting framework 64% 52% Content and frequency of reporting 80% 80% General Vehicle information, Organisation and Governance 80% 58% Capital structure and vehicle level returns 96% 81% Manager s report 90% 85% Property report 76% 73% Risk management 82% 63% Other disclosure requirements 1 12% 27% Overall 72% 65% For the second consecutive year, the equivalent European INREV Review of Reporting Best Practice survey was conducted by PwC, which allows for a consistent approach and sharing of data for global comparisons. European Survery results were not available at time of going to print. 1 The Other disclosure requirements section includes disclosures related to the INREV NAV, and INREV Fee Metrics.

7 REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC THROUGH THE LOOKING GLASS Perspectives on the Evolution and Trends in Reporting Practices in Asia-Pacific The Asia-Pacific region continues to be a dynamic landscape, offering opportunities and challenges, sometimes in equal measure. In an environment such as this, where demands and practices as constantly changing, many fund managers are adjusting their operations accordingly. As part of the 2015 review process, with broader shifts taking place in investor needs and expectations, during the interviews with participating fund managers and investors, we went beyond the development and compliance with the 2014 INREV Guidelines, to discuss themes that as a whole portrayed an ongoing evolution of investor reporting in Asia-Pacific. The key themes and related perspectives which were voiced by fund managers and investors during our review are examined below. Valuations and Portfolio Developments A 360 view In light of the recent economic developments in China and some of the other markets in the region, it was no surprise that investors and fund managers were both of the view that the accuracy and robustness of investment valuations remains their foremost concern, with the communication of qualitative developments and other investment intricacies having equal standing and footing with quantitative disclosures. Such perspectives have reaffirmed the shift in expectations that began a number of years ago, with more information being communicated on a quarterly basis. There is an acute understanding across the region that the valuation process is a fundamentally challenging area even with a fund manager s best efforts to have granular reporting, going through an external valuation review process, and operating valuation committees. In light of these challenges, it was interesting to note from the interviews with investors, fund managers, and valuers, that they were fundamentally aligned with one another, each had a slightly different take on valuations and the valuations process. Their respective perspectives, either as a summary or a quote, have been set out in Table 2 below.

8 05 TABLE 2 VALUATIONS A 360 VIEW OF STAKEHOLDER EXPECTATIONS Expectations Investors Fund Managers Valuers Overall We are strict on the valuations process, requiring independent valuations annually, and engaging external wellknown valuers. Reports will be compared for reasonableness with internal management valuations. All fund managers require their funds portfolios to be independently valued on an annual basis. To fulfil this, they employ: Only large and well known external valuers are engaged for the level of trust and (to meet) bank financing requirements. Valuation practices have matured. 10 years ago some of the valuations that they came across may not have been based on sufficient support; they may not have had access to, for example, a floor plan of the building, or rent rolls to base a valuation on. Depth of valuations On the valuation standards applied We look to not only appraise the underlying property, which most fund managers engage valuers to do, but also the company that the property is held in. We expect that valuations are performed in accordance with recognized valuation standards. Most fund managers require a full-scope valuation annually of their entire portfolios by an independent valuer, as opposed to say a desktop review. Managers will also perform internal rollforward valuations on a quarterly basis. We expect that valuations are performed in accordance with internationally recognized standards in most markets, and country specific standards for others. Fund managers are often price-sensitive to valuation fees. There may not be a fundamental understanding on the valuation work being performed. Cheaper fees would still mean valuations are done properly, but no time can be budgeted for explaining or giving underlying assumptions. We will perform our valuations in accordance with the relevant market standards, or if agreed, internationally recognized valuation standards.

9 REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC Expectations Investors Fund Managers Valuers On the use of comparables In emerging markets (such as second or third tier cities) where markets are illiquid, any reasonably comparable transaction details are opaque. We would need more information on these transactions to understand how they were identified. In a place like China, things are liquidity driven. For properties in Tier 2 & 3 cities, we have seen valuers use comparables from cities hundreds of miles away. However, this may not work sometimes, as in some cases the relevant comparable might be a corner store, which is clearly different from a shopping mall. There are always comparables available when looking to perform a valuation. It is just a case of choosing the best from all available comparables (e.g. For Vietnam, Jakarta can be taken as a proxy). On differences with internal valuations There was a greater demand by investors to also ensure that they understood the underlying developments relating to the properties held by the funds, to better understand the changes in valuations. We have to play a very straight bat with our valuers. We do not try to influence them, we would comment on parameters used by valuers, but would not force valuer to adopt them. Fund Managers/ GPs usually don t want volatility in the property valuations. It was interesting to note from these discussions that the wider industry s view on external valuations were aligned, where they stated that the valuation process should not be influenced, even if there was a disagreement, as the whole point of conducting the exercise was to get independent third party valuations. Even though fund managers stuck to the external valuations, they all believed it was essential to oversee the independent valuation process and have a preliminary review of the valuer s conclusions. These fund managers would seek to ensure that the valuers had all the necessary information to complete their valuations and provide additional information if needed to support any differing view.

10 07 The only exception to that view was held in markets such as India, where valuers tend to use local valuation standards, rather than international standards, such as the RICS Red Book, which are more widely adopted around the region. In situations such as these, fund managers generally raised these differences to investors, though a few managers still believed that they should adjust figures if they did not agree with external valuers, and relied on their internal process and disclosures to investors to ensure due governance. In certain instances notably only for closed-ended fund, some managers felt that the general partner had a duty to amend external valuations which were deemed to be unreasonable. Another key observation that has re-emerged was the use of a panel of valuers approved by fund managers. The panels tended to include larger valuers. The decision to use these valuers tended to stem from the funds operational considerations including investor requirements, approval by lending banks, and consistency across the portfolio. However, considerations such as valuer rotations, and local market knowledge, were cited for using local players, where relevant. It is evident from these observations that the most crucial element in the valuation process is not something technical, but communication and transparency by fund managers. This will continue to be critical in the coming months and years, when portfolios are being reviewed in potentially challenging market conditions. ESG Looking Ahead Another area that continues to take root in the industry is environmental, social, and governance (ESG) analysis. The key developments from the prior years are in the following 2 areas. 1. Depth of the analysis: The ongoing shift from simply participating in surveys such as GRESB s and to a lesser extent this review, to a more in-depth adoption of ESG analysis in the investment decision making process and in capital expenditure plans; and 2. Geography: While Australian managers continue to dominate this space, more and more fund managers from the rest of the region have started to step up in this area, owing to a combination of investor demand, regulatory incentives/pressures, and to a lesser but increasing degree of internal demand for better ESG performance. Given this ongoing evolution, and INREV s current exercise of updating it s Sustainability Guidelines supported by ANREV, in the Snapshot section of this report, we look at the developments taking place, and the views on what implications they would have on funds operations and reporting going forward.

11 REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC The How Mediums of Reporting Having highlighted in the prior year the growing role technology plays in investor reporting (through webcasts and investor reporting portals), it was no surprise to see its continued expansion in the current financial year, with most fund managers considering implementing the use of portals, if they had not already done so. In this regard, fund managers adopted different approaches, with some using internally-built databases, while others opted for a Microsoft Sharepoint solution, or dedicated service providers such as Intralinks or Investment Café. The 2 key drivers for this sustained push have been accessbility and security. In terms of accessibility, the use of a web-based portal/repository would allow fund managers to readily share any news, information, financial reports, investor statements, and updates to standing information with investors right away, without having to wait to print out ed reports. This would allow for not only a streamlined dissessmination process, but also give investors a repository of files and key information. It is for this reason that fund managers (either directly or through placement agents) have increasingly adopted the use of data rooms to facilitate investor due diligence, when raising capital for funds. In addition to the ease of use, security is an often cited reason for the greater implementation of such portals. Given such portals tend to adopt tighter security measures, the chances of such reporting being intercepted or being shared with non-investors, being reduced. Despite this general push to make greater use of technology, some fund managers having a smaller concentration of investors, going the extra mile and building such a platform or contracting a service provider to do so, was not deemed to be cost effective. Besides this, for key communication and for capital calls or distributions, good old fashioned paper was still the preferred route. Overall, fund managers in the region were comfortable with the combination of reporting mediums that was adopted, where most chose to make the reporting available on web portals/ by , complemented by quarterly investor calls, and annual in-person meetings or investor conferences. Flavour du jour? Separately Managed Accounts With markets having been stable for much of the year, capital raising was once again a key activity for fund managers. One key difference for a lot of them, particularly the larger players, was the greater proportion of separately managed accounts when compared with funds, that fund managers were looking to set up. The ongoing use of separately managed accounts is being driven by larger regional allocations giving asset purchasing power to institutional/larger investors, who are keen to get closer to the action, and have more control over purchase/acquisition decisions, rather than investing solely through pooled fund vehicles. Whilst there may be different contractual terms on the operation and reporting of a managed account, investor reporting, which would tend to be shaped by negotiations with the investor, would generally be far more transparent. The INREV Guidelines, therefore, would need to continue in their evolution to set out a framework for fund managers to report under such structures, but be mindful that investors may heavily tailor them to suit individual accounts.

12 09 2 UNDER THE MICROSCOPE Compliance with the Reporting Module of the 2014 INREV Guidelines What a difference a year makes! Following the launch of the new INREV Guidelines in April 2014, and the subsequent 2014 investor reporting review (based on these Guidelines), many fund managers took time out to review and update their quarterly and annual investor reporting templates and deliverables for FY 2014 and beyond. It is clear to see from this year s results and feedback that these efforts have borne fruit. We also expect further improvements next year as several managers plan to review reporting for their new funds currently being marketed. The results of this year s survey are set out below. These overall results have been set out, before analysis is presented by geographic mandate, style, and GAAP. The results have then been analysed in greater depth by each of the eight sections of Module 2. A. Overall Results I. Headline Performance As set out in the executive summary, and above, the headline compliance with the INREV Guidelines on Reporting has moved up to 68% this year, from 57% last year; where nontraditional reporting mediums (e.g. web portals for sharing of items such as standing information) are accounted for, the overall compliance rises further still to 72%. Additionally, regarding the 30 funds that participated in both this and last year s survey (termed in this report as recurring fund participants), they achieved a headline compliance of 70%, while the 17 new fund participants averaged a compliance of 64%. The difference between the recurring and new participating funds can largely be attributed to recurring funds having the benefit of a year s head start in incorporating the Guidelines, particularly for larger managers with more resources to implement these changes. This increase in headline compliance is reinforced by the increase in the overall proportion of funds that comply with over 50% of the Guidelines, with the proportion of funds doing so increasing to 91% (or 43 out of 47 funds) from 58% (or 24 out of 38 funds) last year. The number of funds complying with over 75% of the Guidelines has also increased from 11% last year to 30% this year. Such marked shifts demonstrate that the increases observed in this year s reporting are not anomalous, and apply across the spectrum of participants. A detailed breakdown of the performance distribution by quartile of the participants is set out in Appendix 2 Detailed Compliance Results.

13 REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC Despite the overall increase from last year, areas of non-compliance do exist, and given this, we have set out below the primary reasons that were typically identified for non-compliance, together with the individual guideline requirements or sub-requirements that funds are still looking to implement. Reasons for non-compliance During the private feedback sessions, fund managers were asked to provide reasons why they did not comply with each of the INREV Guidelines requirements not met. These have been broadly categorised into the following themes: New Guidelines and requirements not having been incorporated into the 2014/2015 reporting cycle, was the most prevalent reason for non-compliance. Fund managers (particularly new participants) stated that they would need to be more proactive in keeping up with changes, and adopting future changes on a more real time basis. During the feedback sessions, they actively sought advice and tips on how to better align their reporting with regional best practice, overall, and by style and how their peers were addressing those requirements too; Certain disclosures set out in the Guidelines were felt to be not relevant for their investors. This was especially the case for recurring participants, where fund managers shared that their investors were largely happy with the existing reporting, and a conscious decision has been taken to omit these disclosures. This is expected to be less of a factor going forward with the tailoring of the INREV Guidelines; and Requirements relating to information that was already available to investors elsewhere, either readily (through investor portals) or on request, but was not specifically contained in, or referred to in funds periodic reporting. Where information relevant to the Guidelines requirements was included within static information, and linked from periodic reporting, the reporting was treated as compliant in the scoring.

14 11 CHART 1 OVERALL LEVEL OF COMPLIANCE BY SECTION, AND BY NEW SURVEY PARTICIPANTS VERSUS PARTICIPANTS FROM LAST YEAR S STUDY LEARNING FROM THE OLD PLAYERS 100% Compliance with Guidelines (%) 80% 60% 40% 20% 0% Recurring 2015 New Survey 2015 Overall 2015 Overall 2014 Fund documentation for reporting framework Content and frequency of reporting General verhicle information, organisation and governance Capital structure and vehicle-level returns Manager s report Property report Sections of the Reporting Module Risk Management Other disclosure requirements Overall Chart 1 above shows the breakdown of the overall compliance of the Guidelines, where compliance within the eight sections for the current year ranged from 21% to 86% (20% to 80% in the prior year). With the exception of two sections where no significant change was noted (i.e. Reporting and Content, and Other Disclosures), the chart illustrates that there have been substantial increases in compliance (with most greater than 10%), across the other sections. When analysing the performance of recurring funds against that of new ones, one can note that existing funds as a whole outperformed new ones across all categories, with the biggest gaps between the two groups being in the General Organisation and Governance, Capital Structure and Returns, Manager s Report, and Property Report sections. An in-depth analysis of the performance by the eight individual sub-sections is set out in Part B of this section of the report.

15 REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC As mentioned above, a big contributor to this higher performance was the fund managers process of going through the 2014 Survey s feedback and incorporating relevant comments and changes into their reporting. From the feedback sessions, it was noted that one fund manager had gone deeper and further than their peers. In doing so, they raised their compliance to a near perfect score. Their story is shared below. Case Study: M&G Asia Property Fund s journey to compliance with the Guidelines The Profile: Fund: M&G Asia Property Fund Style Structure: Core Open-ended Geographic Mandate: Asia-Pacific The Headline: From a compliance score of 97% in 2013, to 90% in last year s review, and then having the top compliance score in this year s survey of 98%, M&G Real Estate has made remarkable strides in improving their compliance with the INREV Guidelines each year. The Journey: While investors did not demand and request the fund s to comply with the INREV Guidelines, 3 years ago, management at M&G Real Estate concluded: There is no reason why we should not attempt to comply with the Guidelines. With that decision, the management team reviewed the 2013 INREV Guidelines, to prepare its investor reporting in accordance with them, and investor data requests in accordance with the SDDS. In its pursuit of this goal, in 2013, M&G Real Estate engaged its fund s auditor to independently review all of the fund s reports, checking their compliance with each module of the Guidelines, while the Audit Committee and Board of Directors, also participated in an internal review, even hosting a Q&A section for an in-depth review on each module. For guidelines where the fund was non-compliant, management would revisit them, looking to amend their investor reporting accordingly. With the launch of the new Guidelines last April, management repeated the same process in assessing the changes to the Guidelines. As a result of this annual review process the fund increased its compliance each year. During our feedback session with them, they stated that the 2014 Guidelines were clearer in the summarizing how a fund s fee structure impacts its capital structure and fund level returns, as well as the expense ratios. There were still some of the old guidelines which management preferred, including the guideline covering modification on the property tax description.

16 13 II. Performance by Style/Structure TABLE 3 HEAT MAP 2 OF COMPLIANCE BY SECTION OF the reporting module AND BY FUND STYLE Sections of the Reporting module of the Guidelines Weighting Core (open ended) Core (close ended) Opportunity (open ended) Opportunity (close ended) Value added (open ended) Value added (close ended) No. of Funds Fund documentation for reporting framework Content and frequency of reporting General vehicle information, organisation and governance Capital structure and vehicle-level returns 2% 66% 100% 50% 43% 50% 61% 6% 80% 90% 80% 82% 80% 73% 12% 80% 55% 78% 58% 70% 60% 6% 97% 71% 90% 85% 83% 74% Manager s Report 17% 91% 79% 85% 86% 68% 83% Property Report 29% 75% 79% 75% 72% 94% 70% Risk management 13% 83% 67% 70% 63% 77% 60% Other disclosure requirements 15% 11% 50% 9% 17% 25% 39% Overall 100% 73% 74% 67% 63% 68% 65% Degree of change (in percentage points): <-30% 0 to 10% -30% to -21% 11% to 20% -20% to -11% 21% to 30% -10% to 0 31%+ 2 The heat map represents not only the current year s performance, which are percentages shown in the table, but also the percentage point change from the prior year; cells shaded in red representing increases from the prior year s review; those in blue representing corresponding decreases; and white representing a new grouping. The darker the shade, the greater the percentage point change increase or decrease.

17 REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC When broken down by section of the Guidelines and fund style, we noted that there was an underlying increase across styles (core, value-added, and opportunity), as well as by structure (open and close-ended). While decreases were observed (in the Reporting and Content, Risk Management, and Other Disclosure Requirements sections), it was noted that most were marginal decreases, and usually because of guidelines that required a degree of static or information, e.g. descriptions of the reporting, risk, and governance frameworks of the fund, which were not disclosed in the annual or quarterly reporting, but shared through other mediums or documents. In Part B of this section, tips for best practice around reported through other mediums. As noted in previous surveys and observed once again this year, open-ended funds generally performed better than closed-ended funds across all three styles, though closed-ended funds have somewhat closed the gap. This is not surprising as most of the open-ended funds tend to operate in more transparent setting, where market practices for open-ended funds has developed to a great degree. For closed-ended funds, as they tend to have fewer investors, who have longer holding horizons, they get their comfort from an ongoing dialogue with the respective fund managers, hence require less information to be presented in quarterly and annual reports. The adoption of different mediums by closed-ended funds to meet some of the Guidelines requirements, and their incorporation into this year s reporting process, have contributed to them closing the gap on their open-ended peers. Of the three fund styles, once again core funds scored better than either the value-added or opportunity funds. This year there was very little to chose between structures, core closedended funds surprisingly scoring slightly better than their open-ended counterparts. Apart from this, it was interesting to note that the difference between the compliance of value-added and opportunity funds is marginal, with the former group outperforming the latter by only 1-2%. As the Guidelines become either tailored or attributed to suit each style of fund, it will be interesting to see how the compliance levels and distributions evolve, we would expect compliance to increase, and the differences in compliance levels between strategies to reduce.

18 15 III. Performance by Geographic Mandate TABLE 4 HEAT MAP 3 OF COMPLIANCE BY FUND STYLE AND GEOGRAPHIC MANDATE Country Strategy Geographic Mandate Fund Style/structure Single Country Australia Japan China Others Multi- Country Overall Core Open ended 74% 74% 76% 72% Close ended 56% 86% 71% Value Added Open ended 72% 72% Close ended 52% 68% 68% 65% Opportunity Open ended 76% 64% 64% Close ended 58% 60% 59% 69% 64% Overall 74% 53% 63% 70% 71% 68% Number of funds Proportion of Top Quartile Performers 25% 8% 0% 8% 59% 100% Degree of change (in percentage points): -20% to -11% -10% to 0 0 to 10% 11% to 20% 21% to 30% 3 The heat map represents not only the current year s performance, which are percentages shown in the table, but also the percentage point change from the prior year; cells shaded in red representing increases from the prior year s review; those in blue representing corresponding decreases; and white representing a new grouping. The darker the shade, the greater the percentage point change increase or decrease.

19 REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC Looking at the levels of compliance with the Guidelines, by fund style, and country strategy, the findings can be broken down as follows: Leading the way: With a 5% increase in compliance from their performance in the prior year, Australian funds continue to outperform funds with other geographic mandates. The Australian property market is viewed as being very transparent, which we presume helps managers source underlying data to aide compliance. The Multi-Country funds fared better than most single country funds, thanks in large part to the performance of their core funds, which even outperformed the Australian country funds. Middle of the pack: China and Other single country mandated funds have also shown significant improvement from the prior year s review, with compliance increasing by 19% for the former group, and 32% for the latter. The performance by the Others group, which included mandates in India and Korea, benefited from open-ended funds, which were firsttime participants. Playing catch-up: The sole exception to the improved performance seen across other geographic mandates, belonged to Japanese funds. The reason for this relatively softer performance was in part due to the choice of GAAP (which is analysed next), but also because managers there are only familiarising themselves with the Guidelines this year, and so are still working their way up the Guidelines curve.

20 17 IV. Performance by GAAP In the 2014 Edition of the Guidelines, there is no longer a specific section on financial reporting, as requirements from this section within the Old Guidelines have now been split between other sections in the current version. Choice of GAAP continues to be heavily correlated with overall compliance, as annual reports, including audited financial statements, play an integral part in the investor reporting dialogue. Therefore, to shed some light on the relationship between GAAP and compliance with INREV Guidelines, we analyse participating funds performance by GAAP (in Chart 2 below), and further by how the investment portfolios are accounted for (in Table 5). CHART 2 LEVEL OF COMPLIANCE BY ACCOUNTING STANDARDS ADOPTED OVERALL JAPAN GAAP GAAP US GAAP OTHER IFRS EQUIVALENT AASB IFRS Level of Compliance (%) While the overall compliance of both US GAAP and the IFRS (and its equivalents) funds improved, the performance of the IFRS funds (even after excluding the Australian funds), was on average 3-4% better. The reasons for this are the detailed disclosure requirements in IFRS standards, such as IFRS 7 s risk management disclosures; and the full consolidation of portfolio operating companies, which is further analysed below.

21 REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC With the revised IFRS 10 Consolidated Financial Statements standard being effective in 2014, many fund managers underwent a process of evaluating whether or not the fund would qualify as an Investment Entity 4, as defined by the standard. If the fund is an Investment Entity, the fund would need to fair value their holding companies, adopting a similar approach to that used under US GAAP for Investment Companies. While this will simplify the fund s financial reporting, it will also likely reduce transparency and decrease compliance with the Guidelines. The process of evaluation is not a policy choice, and is a highly judgemental, as the definition of Investment Entity is complex and subjective for real estate funds. To add to the complexity, the prevailing sentiment from fund managers (both this year and last), was that changing the accounting of the portfolio investments for existing funds to reduce the transparency of the portfolio would not be taken well by investors. As a result of this, in the analysis of how portfolios are accounted for (Table 5 below), it was not surprising to see very few IFRS funds shift from Consolidation to Fair Value, with only five respondents adopting the Investment Entities approach. Despite this slow start out of the gate for the revision to IFRS 10, it is expected that more and more of the funds that are being raised and launched, would re-evaluate its requirements, and how best to supplement the streamlined financial statements disclosures under IFRS 10, with additional information in other sections of the annual report. As one fund manager put it: Investors are more interested in knowing the NAV of the fund and (qualitative) property information they are more interested in their capital account report & share of fees! Consolidated numbers are not really the key focus. The only outlier in this analysis, is a fund preparing its reporting in accordance with Japan GAAP, which continues to require a cost-based approach. As such, with no fair value and the associated descriptive disclosures required under other GAAPs, it is not surprising to see that the overall compliance for this GAAP has not changed significantly from the previous year. This contrasts with other Japan-mandated funds, which prepared financial statements on a fair value basis, and consequently had a higher compliance. 4 The definition of an investment entity, and the possible implications for real estate funds can be found in the following links: IFRS 10 (Revised): Entities-Amdments-to-IFRS and-IAS-27-summary-and-feedback.pdf IFRS 10 Impact for Real Estate Funds:

22 19 TABLE 5 RESPONDENTS BY ACCOUNTING STANDARDS Accounting/GAAP FY 2015 FY 2014 FY 2013 Number % Number % Number % Consolidation/Equity Pick-up and fair value at asset level IFRS Australia IFRS Other IFRS Sub-total Fair value of projects at fund level US GAAP IFRS Sub-total Cost based Japan GAAP IFRS Australia IFRS Sub-total Total * Notes There is one fund (FY 2014: 1; FY 2013: 3) reporting under IFRS with investments held through joint-venture investment structures, and recorded under the equity method. The underlying investments held by the joint-venture entities are booked at fair value in two of the funds and at cost less impairment in the other one. No IFRS or equivalent funds had early adopted Investment Entity reporting (which fair values projects at the fund level) in FY2014 and FY2013. To gain further understanding of the areas and types of non-compliance, the assessment results for each of the individual sections of the current INREV Guidelines are presented next.

23 REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC B. INREV Guidelines Reporting Module Section Results I. Fund Documentation for Reporting Framework Purpose: This section of the Reporting Module of the Guidelines, which include only two requirements, sets out the high-level basis for a fund s reporting framework, and whether a fund defines key terms included within the reports. Overall Compliance level: 57% (Prior Year: 41%) Noteworthy Requirements: INREV Guidelines Reference INREV Guidelines Description FD 19 FD 20 Does the fund documentation include the basis, the frequency and timing of the preparation of the annual reports? Are terms not defined in 12.1 Definitions defined in the annual report? 37% 42% 100% 67% Insights: This section of the Reporting Module consists of two requirements, the marked increase was driven by compliance with FD 20. Conversely, there was a decrease in compliance with FD 19, as the basis and timing of reporting were more often not included in either annual or quarterly reporting, or other documentation being made available to us. A common observation across the region was that this information is often set out in a private placement memorandum ( PPM ), limited partnership agreement ( LPA ), and to a lesser extent, static pages in investor reporting portals, which do not form part of the annual or periodic investor reporting process. Our Top Tip for better compliance FD 19 As the basis, frequency and timing of reporting (specifically for the annual report of the Fund) is stated in their LPAs or PPMs, and does not get refreshed on a quarterly or an annual basis, most fund managers do not want to bloat their periodic investor reporting by repeating this static information. It is thus suggested that fund managers make reference in their reporting (whether in their annual or quarterly reports, or webcasts, or calls), to this documentation. For funds that have investor portals, with a reporting timelines section or webpage, similar references can be made with hyperlinks to relevant documents. This will not only improve compliance with the guideline, but also serve to keep investors up-to-date on the expected reporting basis and timelines.

24 21 II. Content and Frequency of Reporting Purpose: This section of the Reporting Module of the Guidelines sets out what statements and items should be included within reports to investors, particularly the annual report. Overall Compliance level: 80% (Prior Year: 80%) Noteworthy Requirements: Best performers: INREV Guidelines Reference INREV Guidelines Description RG 3 RG 4 Is the annual report in a consistent format throughout? Does the annual report contain: Balance sheet? Income statement? Statement of changes in equity? Statement of cash flows? Notes to the financial statements? 100% 100% 100% 99% Worst performers: INREV Guidelines Reference INREV Guidelines Description RG 7 RG 7 Does the annual report disclose the level of compliance with INREV guidelines on a module by module basis? This should include any relevant explanations, reconciliations and calculations. Has management reviewed the above statement concerning the level of compliance with INREV Guidelines? 9% 0% 11% 3%

25 REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC Insights: Compliance with this section of the Reporting Module has not fundamentally changed from the prior year. A key reason continues to be the low level of compliance with RG 7, given its specific link to the INREV Guidelines themselves. Most fund managers stated that they did not know how best to go about making such disclosures in light of the fact that all but a few funds had a minority of European-based investors, who would be the most likely group of investors requiring such information. Furthermore, many fund managers were worried that they were not fully compliant with all the modules of the INREV Guidelines, given the subjectivity and judgement required in applying all of them. As such, fund managers were understandably wary of making this disclosure in their periodic reporting, with one fund manager stating: What does full compliance mean, 100%?, 98%? With many points subjective, can we make such a claim? Our Top Tip for better compliance RG 7 While it is encouraged to comply with all modules of the INREV Guidelines, for a fund to be compliant with RG7, it simply needs to include in its reporting the degree it complies with the INREV Guidelines. Therefore, a fund s reporting would simply needs to state which modules they comply with, even if it the fund is non-compliant with certain modules. Furthermore, while fund managers are happy to disclose this information on an ad hoc basis, it is best practice for them to inform all investors, either in their periodic reporting, or other means (through webcasts, calls, etc.) that such information is available upon request.

26 23 III. General Vehicle Information, Organisation and Governance Purpose: This section of the Reporting Module of the Guidelines sets out the key underlying information of the fund and its organisation that should be circulated to investors. It includes both strategy-related information, and an explanation of both fund and vehicle level governance. Overall Compliance level: 67% (Prior Year: 59%) Noteworthy Requirements: Best performers: INREV Guidelines Reference INREV Guidelines Description RG 10 RG 16 Does the annual report include: name?/domicile?/legal form? /fund style?/ description of fund structure/year-end? a short, high level summary of the fund strategy? 98% 98% 94% 84% Worst performers: INREV Guidelines Reference INREV Guidelines Description RG 15 RG 14 a description of the level of compliance with the corporate governance framework defined in the fund documentation? the level of adoption of INREV corporate governance best practices? 26% 18% 7% 0%

27 REVIEW OF INVESTOR REPORTING TRENDS ASIA-PACIFIC Insights: While compliance with this section had improved from the prior year (owing to improved compliance with guidelines such as RG 16), it continues to be relatively lower than what one might expect. The two primary reasons for this are: 1. Static Information: Some of the fund managers felt that some of the requirements in this section require a fund to disclose information that is static, and wanted to avoid bloating their reporting. An example of this is RG 13, which requires a discussion of vehicle governance and oversight frameworks, such as the use of independent directors and special committees and how they operate. Compliance with this guideline was only 51% this year and 42% last year, as many managers stated a preference for keeping their reporting focused, and not adding information contained in an offering document, unless it had changed. 2. Discussions: The guideline in this section now require a discussion on the operations of and compliance with the governance framework adopted by the fund, which is where RG 14 and 15 come in. While most fund managers do not necessarily adopt the INREV corporate governance best practices (RG 14), it was interesting to note that only a quarter of funds disclosed the level of compliance with their own stated frameworks (RG 15). While many had to contend with internal compliance and legal protocols around reporting, the often cited reason for this relative lack of disclosure was the preference to report compliance and governance matters by exception. However, it was encouraging to note was that the funds that did report such information, and thus complied with these guidelines did have in-depth disclosures, with one group of funds reporting a full checklist of governance practices, and the level of compliance with each item. We continue to note a difference in opinion between fund managers on how best to achieve better compliance with this aspect of the section, with some preferring to include this information within the quarterly and annual reporting, and others preferring to include through other channels disclosing it only within their investor web portals. Our Top Tip for better compliance RG 14 & 15 As corporate governance is a fundamental part of a fund s operations, we would recommend that fund managers should look to keep investors updated on an ongoing basis about the level of their fund s compliance with their own framework by sharing information periodically on board and committee discussions and resolutions. Furthermore, in assessing the fund s corporate governance against best practice, managers should look to use INREV s tool to perform a selfassessment against INREV s corporate governance framework: (