NCREIF Updates ODCE Index Inclusion Criteria: What Investors Need to Know

New developments are underway in the world of real estate investment. The NCREIF Board recently made key updates to the ODCE Index inclusion criteria, and it’s essential for all stakeholders to understand the implications of these changes. Here’s a summary of the recent changes and what they mean for investors:

NCREIF Policy Statement

Effective March 31, 2024, the ODCE component funds must adhere to updated NCREIF policies. The key changes focus on revising investment thresholds for property types & subtypes within the index. Here's a summary:

1. Property Types

At least 75% of the fund’s real estate portfolio must be invested in office, industrial, residential, and retail properties. The fund may include the value of loan investments if the underlying collateral aligns with these property types.

2. Property Subtypes

A maximum of 25% of the fund’s portfolio can be invested across the following six expanded property subtypes, including single-family rental, manufactured housing, student housing, industrial life science, office life science, and medical office, while not exceeding specified thresholds.

Accordant’s Key Takeaways

• Rationale Behind the Change: The updates aim to reflect capital flow trends and maintain ODCE’s relevance as a leading private real estate index.
• Component Fund Consideration: The ODCE component funds were consulted, and they are all currently in compliance with the new criteria. No new funds are expected to enter the Index in the near term due to these updates.
• Index Transparency: The new criteria enhance transparency into the Index’s sector composition and performance.

Inclusion Criteria Overview

The updated inclusion criteria now involves a two-step test, providing a clearer understanding of investment diversification. The following compares the old and new criteria:

Property Type Classifications

Property type and subtype classifications have been updated to differentiate investment exposure more clearly. Notable changes include the promotion of self-storage and senior housing to major property types and the reclassification of the apartment property type to "residential" with apartments classifying as a subset of residential. Office properties now include subtypes such as medical office and life science, along with more precise location designations like central business district (CBD), urban, secondary business district (SBD), and suburban. The industrial property type now includes the life science and specialized subtypes. The following illustrates the property type and subtype categories as well as diversification thresholds that ODCE component funds must adhere to going forward:

Source: IDR, NFI-ODCE Index. Estimate of property type diversification by new NPI categorizations as of 4Q 2023.

Conclusion

All ODCE component funds are currently in compliance, yet managers now have greater latitude as it relates to portfolio construction to overweight and underweight property types and subtypes, reflecting the evolving landscape of real estate investment. This may result in further performance dispersion across funds in the Index.

In summary, these updates mark an important milestone in the evolution of the ODCE Index, aligning it with current market trends and providing investors with greater transparency and opportunities for diversification. As the real estate landscape continues to evolve, staying informed and adaptable will be key to maximizing investment potential in this dynamic sector. 

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. Accordant is not adopting, making a recommendation for or endorsing any investment strategy or particular security or property mentioned in this article. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. All investing is subject to risk, including the possible loss of principal. Accordant Investments, LLC (“Accordant”) cannot guarantee that the information herein is accurate, complete or timely. Past Performance does not guarantee future results.

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