Using NCREIF to Benchmark Performance

Can someone explain how you go about benchmarking performance against NCREIF? I have a very basic understanding--you want to compare your returns to your prefered NCREIF index, breaking it down by product type/geographical areas, when appropriate--but I feel like there is a lot more to it than that. Below are some of my questions I have and please don't hesitate to add anything I did not mention (idk what idk!).

  1. What are some things to consider when deciding which NCREIF index to use (NCREIF-ODCE vs. NPI)? If you're a private investor (i.e. $250M AUM) is NPI more suitable vs. if you're a fund with $1B AUM NCREIF-ODCE is better fitted?
  2. How do you 'normalize' you property returns so that it's an apples-to-apples comparison to the NCREIF returns? I know NCREIF uses a Time-Weighted-Return, but don't understand why they use it and what exactly that is? Why do they use a TWR instead of IRR, when IRR is usually the standard for private investments?
  3. Do most people adjust the benchmark to their specific portfolio? For example, is it pretty standard for an office investor in NYC to only use NCREIF returns for office assets in NYC as there benchmark, or is this not typical?
  4. Do most private real estate investors that raise outside capital do this sort of benchmarking?

Thanks in advance for any help!

2 Comments
 
Most Helpful

A lot of this is google-able, but here you go anyway:

  1. NFI-ODCE includes leverage and includes a wider array of assets (non-core, debt instruments, etc.) while NPI is unlevered core properties - pick the bucket that fits you the most.
  2. Time weighted returns are normalized by default. You can read up on it more, but the way I've thought about it is a TWR is the return on one dollar invested since the beginning of the investment period. So if I invested $1.00 and now I have $1.50, my return is 50%. A few reasons for using this vs. IRR:
    1. Normalizes for manager size - it allows a more fair comparison of managers with differing size funds. It's what you did with your money, not how much you have.
    2. Harder to game - IRRs are notoriously easy to game with funds. I can put the entire investment on our subline at 1.5% (well, it was 1.5% when I was tracking them no idea what it is now) so that the investors don't have to put in any money until right before the day I sell and voila! a 100000000% IRR is born. Some pension funds allow/encourage this, while others refuse to allow for the guarantees that get banks comfortable to offer a subscription line.
    3. Go readyou can't eat IRR for a more detailed comparison between IRR (money-weighted returns) and TWR (Time-weighted returns).
  3. Yes people will take the regional and product type to the extent possible as their benchmark, though they may compare it to the overall benchmark as well. What you compare it to is usually mandated by your investor though, so it's not really up to the fund.
  4. It's not generally done in my experience unless mandated by an investor or as part of a pitch deck (in which case the fund is pitching to people who care about and will ask to benchmark to an index anyway). If it is part of a pitch deck, the fund is likely cherry picking the data to the extent possible to make them look as good as possible.
 

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