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GIPS - real estate provisions

Hi all,

Can someone explain to me the “three geometrically linked monthly returns”? Thank you!

Real estate portfolio accounting, including valuation, is usually performed internally on a quarterly basis, and, therefore, both portfolio and composite returns are typically calculated quarterly. For any given quarter, the sum of the income and capital component returns will equal the total return, with any differences solely due to rounding. The GIPS standards require that firms must calculate real estate portfolio returns at least quarterly (I.6.A.6). However, some firms calculate portfolio returns monthly for some or all of their real estate composites. In these instances, the sum of the monthly income and capital component returns will equal the monthly total return, but this relationship will not hold for the quarterly returns calculated using three geometrically linked monthly returns. See further discussion later. The typical return formulas utilized by real estate firms to calculate component and total returns are depicted later in this section for informational purposes. The GIPS standards allow flexibility in choosing the calculation methodology, which means that firms may use alternative formulas, provided the calculation method chosen represents returns fairly, is not misleading, and is applied consistently. The calculation of component returns should be the same for all real estate portfolios within a composite.

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If  returns during 1st 2nd 3rd month are 5% 2% 3% respectively, then geometrically linked return for the quarter will be 

= [(1+ 0.05)*(1+0.02)*(1+0.03)]-1

= 0.1031 

=10.31%