INVESTMENT
Touring NCREIF ’ S property total return index
THE ARRAY OF INDEXES REPORTED BY NCREIF ALLOWS FOR COMPARISONS OF PROPERTY RISK- ADJUSTED RETURNS TO THE APPROPRIATE INDEXES .
Contributed by JACK CORGEL , PH . D ., SENIOR ADVISOR , CBRE HOTEL RESEARCH
Hotel real estate investors need to measure both the absolute and relative financial performance of their properties . A 10 % annual return may appear solid unless a collection of comparable investments earned 15 %. Risk-adjusted returns measured against the appropriate index provide a way to assess managers ’ abilities to generate excess returns . Measures of investment return come in many flavors .
The multi-period IRR can be computed as a realized or unrealized percent . Equity dividend rates are an example of a single-period , income return counterpart to internal rate of return ( IRR ). Calculating equity dividend rates and IRRs for commercial real estate is straightforward for one property but generating IRRs for a multi-property index presents problems .
The compromise reached more than four decades ago for reporting commercial real estate returns to pension funds by fund managers captures both the income and capital realized returns over a single holding period . These holding-period total returns for individual properties then can be compared to a return calculated in the same way for a collection of similar properties .
UNDERSTANDING NCREIF
Under ERISA in the United States , pension fund managers are required to diversify plan assets in their control to minimize risks . Because plan assets historically consisted of equity and debt securities , real estate professionals following the enactment of ERISA in 1974 developed an institutional infrastructure to support the use of commercial real estate investments as diversifiers .
This infrastructure included the creation of the National Council of Real Estate Investment Fiduciaries ( NCREIF ) organization , the membership of which are asset managers of ERISA-qualifying plans , and the development of total return indexes for commercial real estate .
The historical series of indexed returns has been useful for demonstrating the diversification benefits of commercial real estate and allows pension plans to evaluate managers based on how they perform relative
34 hotelsmag . com May / June 2021