Understanding NCREIF: Real Estate Investment Performance Data

NCREIF is an acronym of the National Council of Real Estate Investment Fiduciaries, and it operates as a non-profit entity. The main aim of the NCREIF is to inform concerned parties on the actual performance of the real estate industry, so they can use the information to make informed decisions. The association performs its role by collecting relevant data, analyzing the data, and then presenting it in relevant forms to the target audience.

The NCREIF attempts to inform real estate investors on the risks of return in the market, as well as the current trends that investors should be aware of. It also improves the transparency of the real estate industry through the various statistical data it releases in the market. For example, the property index and other statistical analysis published by the association help investors understand the operations in the real estate investment industryReal Estate Investment Trust (REIT)A real estate investment trust (REIT) is an investment fund or security that invests in income-generating real estate properties. The fund is operated and owned by a company of shareholders who contribute money to invest in commercial properties, such as office and apartment buildings, warehouses, hospitals, shopping centers, student housing, hotels while identifying weaknesses and opportunities that investors can leverage.

Summary

• The NCREIF oversees the collection, dissemination, and validation of reports on the performance of the real estate investment market.
• Institutional investors count on the NCREIF for a timely analysis of the risk of returns in the market at any given time.
• The NCREIF publishes the property index and other inferential statistics on a quarterly basis.

NCREIF Membership

The NCREIF comprises approximately 215 members, mostly institutions and academic groups. The association is categorized into three classes of members. The first group comprises data contributing members, which consist of institutional investment managers Portfolio ManagerPortfolio managers manage investment portfolios using a six-step portfolio management process. Learn exactly what does a portfolio manager do in this guide. Portfolio managers are professionals who manage investment portfolios, with the goal of achieving their clients’ investment objectives.that oversee real estate investments with a market value above $50 million.

The second category comprises professional practice members like pension consultants, information brokers, and appraisers. The second group is heavily involved in various areas of the real estate industry, even though they may not own any assets under management. The last category comprises academic group members who play a significant research role in the real estate industry.

The NCREIF members are required to operate within the stipulated rules and regulations provided by the entity. For example, each category of members must perform their assigned roles within the stipulated periods, failure of which results in their membership being revoked.

For example, if a member joins as a data contributor, they must submit the appropriate data in each quarter. Failure to do so leads to the termination of their membership. The NCREIF also prohibits members from joining more than one of the three categories or switching membership to another category.

The NCREIF Property Index (NPI)

The NCREIF Property Index measures the performance of real estate investments on a quarterly basis and evaluates the rate of returns in the market. The NPI covers properties that are acquired in place of institutional investors that are exempted from taxes in the fiduciary environment. The NPI uses the current property values in the market as opposed to using the initial cost for developing the property.

The properties used in the NPI are supposed to be valued as often as every three months. The appraisalAppraisalAn appraisal is basically a way to conduct an unbiased analysis or evaluation of an asset, a business or organization, or to evaluate a performance against a given set of standards or criteria. Performed by a qualified appraiser, an appraisal is usually done whenever a property or asset is to be sold and its value needs to be determined can be done internally or externally but should undergo an external valuation at least once every three years.

NPI Inclusion Attributes

For a property to be included in an NPI, it should fulfill the set-out requirements.

Properties already in operation should be at least above 60% occupancy rate when taking part In the NPI. The property types allowed into the NPI are hotels, office buildings, industrial properties, apartments, and other retail use properties. Allowed properties can be wholly owned or even jointly owned properties. Returns on investment are required to be reported without leverage.

Index Data Validation

The NCREIF follows a data validating procedure that comprises three steps. The process is quick to ensure that any errors in data submission are noted and consequently corrected. The submission process is undertaken by specialized software engineered specifically for the exercise. The software runs tests on the data to pinpoint any inconsistencies in conforming to the set standards.

Errors should be corrected before the final submissions. Warnings issued by the system highlight any outliers from usual norms. Abrupt changes in the value of a property from one period to the next is an outlier, and thus the system will issue a warning on such occurrence.

The NCREIF also conducts its own form of validation after the final submission to iron out any conspicuous anomalies. The validation is a two-step process. The first step is repeating the tests done by the contributors of the data, while the second step is the comparison of a contributor’s result to the results of other contributors.

The Index Oversight Committee (IOC)

The Index Oversight Committee (IOC) is tasked with the responsibility of upholding integrity in the board of directors by recommending changes, where necessary. It also reviews policies and quarterly indices to maintain the highest levels of transparency. The committee can also sanction the board for inconsistencies, including untimely reporting of the required reports.

The IOC comprises five top researchers who have enough understanding of the member firms’ databases. The researchers have a deep understanding of the prevailing market trends, indices, and their methodologies. The IOC always takes a vote to pass policies, recommend directors’ changes, or release any indices. The majority vote wins; hence, the odd number of members.

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Commercial Real Estate BrokerCommercial Real Estate BrokerA commercial real estate broker is a middleman between sellers and buyers of commercial real estate, helping clients sell, lease, or purchase them.
• Foundations of Real Estate Financial ModelingFoundations of Real Estate Financial ModelingLearn the foundations of real estate financial modeling in this introductory guide to building a financial model for a real estate development project.
• Real Estate Joint VentureReal Estate Joint VentureA Real Estate Joint Venture (JV) plays a crucial role in the development and financing of most large real estate projects. 
• RealtorRealtorA realtor is a real estate professional who is officially registered as a member of the National Association of Realtors (NAR). The NAR is a North American trade association for professionals working in the real estate industry.