by Richard Baillie
Investment Property Databank (IPD) is to bring its annual index into line with gilt and equity measurements, allowing direct performance comparisons across asset classes for the first time.
The new model for the index, already the industry’s standard, will be calculated on the assumption of continuously accrued income. The traditional valuation model assumes that income is received annually in arrears. Most leases state that income should be received quarterly in advance but, in reality, income is often a continuous flow.
Applying to both IPD’s annual index and its annual portfolio analysis reports, the change will remove the main difference between IPD’s annual and monthly index calculations. It starts in March.
The change follows lengthy consultation with IPD’s 250 users and financial institutions. Using data going back to 1971, the new calculation should result in an average annual improvement of 0.3% pa because the old system failed to take account of the possibility of reinvesting income collected throughout the year. Virtually all funds will therefore see a slight improvement in their medium-term (three-year) results.
IPD MD Ian Cullen (above) said: “It has become clear that property was disadvantaged through the old method. The 0.3% improvement in performance is not trivial compared with other asset classes.”
Paul McNamara, property research manager at Prudential Portfolio Managers, said that the industry would be “pleased to see property in line with other asset classes,” but added that it was unlikely to change fund managers’ views of property. “The new system gives the most accurate picture of what actual property returns are. It should push the post-war return to around 3% real rather than 2.5% real, but it’s still a long way behind equities,” he added.
Robert Peto, head of investment at DTZ Debenham Thorpe, said the change would make the new index more volatile. He said: “Technically, it’s better because it takes timings of cash flow into account and it makes it easier to assess the performance of fund managers. However, people running indexes, such as BZW, will have a problem because the new index is more volatile.”
However, Ian Reid, chief executive at BZW property investment management, was unconcerned about its effects on BZW’s property index certificates, which have enabled investors to mirror IPD returns since their launch in 1994. “If volatility increases it might create a greater dispersion of individual funds around the average, but on PICs we give people a quarterly income and we’ll continue to give them the same as they get from IPD.”
