Early statistics from the ABN Amro/IPD European private real estate funds index show returns for this new and rapidly growing market slightly lagging behind direct property, but this may be down to temporary factors such as initial costs and a lack of gearing
Performance of underlying property in the nascent European private real estate funds market is slightly lagging behind its direct property rival, according to figures from ABN Amro/IPD.
Figures from the ABN Amro/IPD European Funds index, with performance analysis that focuses on the UK limited partnerships sector, show that this sector produced a 9.4% portfolio return, annualised over the three years 1999 to 2001, for underlying real estate. This compares to the IPD Universe (direct property) index return of 11.1%. With gearing, the portfolio returns figure for the funds sector rose to 11.8%.
Phillip Rose, European head of real estate at ABN Amro, says the fund sector’s lack of maturity has contributed to its relative underperformance. For example, most of the funds in the index are in their first year or two, so returns were drained slightly by initial transaction costs. In contrast, the direct property IPD Universe index gains from its sector’s maturity, with its returns enhanced by trading and development.
Rose adds that it will be around two more years before it will be possible to judge from the index the extent to which the management and specialised remit offered by funds has added to underlying asset performance. “It is not yet clear whether sector-specific funds offer added value, but added value can be achieved through gearing,” says Rose.
Gearing’s relatively small contribution to the sector was also reflected in the early stages of the index, says Rose. The funds in the IPD directory, which accompanies the index, have an average gearing of 42%, falling to 22% for the fund sample. Rose estimates that the fund index comprises around 30% of all funds in Europe, with the lower-geared funds most likely to contribute at this stage.
No opportunity funds have so far released results for inclusion in the index. “If we could extrapolate these results to the opportunity funds, we would see that a lot of value is gained through their highly geared financial structure,” Rose adds.
Rose expects the funds’ strong UK weighting to change as the number of participants rises. Mark Callender, research director at IPD, adds that IPD’s research shows that funds invested in the UK tend to specialise by sector, whereas European investment vehicles’ outlook is wider, with exposure to several countries.
The rapid rise in the total value of the funds index – from €6.1bn in 1998 to €28bn in 2001 – reflects a shift in how property assets are held and managed. “Institutions have outsourced,” says Rose. “The model now is not to have large in-house property teams but smaller groups who pick investments.”
The index shows that while institutions have been the main source of capital for funds, property companies have played a large role, providing 21% of its capital, mainly from property companies sponsoring vehicles.
This year has also seen a widening of the range of portfolio returns. Last year, the spread of returns was between -6.3% and 20.4%; in 2000, the spread was between 2.1% and 15.2%. Rose adds: “Returns were lower in 2001 and gearing returns exacerbated the overall returns divergence.”
Rose hopes to encourage more funds into the IPD’s index, particularly opportunity funds. “It will require investors’ active involvement to create a momentum for them to participate,” he says.
The ABNAmro/IPD European Real Estate Funds directory is available from IPD. Tel 44 20 7643 9229
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Investor returns from limited partnerships vs other property assets |
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In 2001’s flat market, limited partnership investors saw returns just over 1% behind those for other property assets |
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1999 |
2000 |
2001 |
Annualised past 3 yrs |
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Limited partnerships |
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Standing investment returns % |
13.5 |
9.5 |
6.4 |
9.8 |
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Portfolio returns %* |
13.2 |
8.6 |
6.4 |
9.4 |
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Impact of gearing % |
1.9 |
1.8 |
-0.2 |
1.1 |
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Impact of cash holdings % |
-0.1 |
-0.1 |
-0.2 |
-0.4 |
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Impact of other costs % |
-0.5 |
-0.4 |
-0.4 |
-0.4 |
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Estimate of investor returns % |
14.5 |
9.9 |
5.6 |
10.0 |
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IPD Universe |
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Standing investment returns % |
14.8 |
10.8 |
6.8 |
10.8 |
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Portfolio returns %* |
15.1 |
11.4 |
7.0 |
11.1 |
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Source: ABN Amro/IPD *includes buying, selling and developments |
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