UK non-listed real estate funds posted their second lowest returns since the global financial crisis in 2016, according to INREV’s annual index.
With a 2.2% return, the UK underperformed the western Europe average of 5.7% and the total European average of 6%. Only central and eastern Europe and Italy performed worse.
The fall in UK returns from 12% in 2015 to 2.2% is reflective of how volatile the country is compared to the rest of Europe. The difference between the highest annual return and the lowest return since 2001 was 54.8 percentage points in the UK, but 37.8 percentage points for Europe as a whole, which implies the booms are stronger and the busts are steeper.
Henri Vuong, director of research and market information at INREV, said: “The uncertainty surrounding Brexit caused widespread caution, but this was probably just an extension of the underlying characteristics of the largest and most volatile market in Europe.
“While deployment of capital remains a challenge, there is a possibility that the UK market is stabilising after reaching its post-crisis peak of 16.7% in 2014.
Despite funds’ performance being more muted across Europe last year, down 3.7 percentage points from the year before, 2016 was the second time in a decade – after 2015 – that no region in Europe reported a negative return.
Funds targeting Finnish property returned 15.3% – the highest of any European country for the second time in the past 10 years – followed by the Netherlands at 14% and the Nordics at 12.1%.
European core funds and value-added funds performed equally for the first time in 2016 both at a 0.9% return. Historically, core funds tend to be more resilient in periods of low returns and more muted during booms. Over a long enough time period, these differences balance out, which means that since 2001, core funds have outperformed value-added ones but only marginally at 0.4 percentage points.
Although logistics funds have been strong performers in the UK, residential funds have been stronger in Europe more broadly and were the only sector-specific funds to perform better in 2016 than in 2015. Nearly three-quarters of those funds are based in the Netherlands.
In comparison to the UK, office and retail funds were the lowest performers in Europe. This is in part because of their considerable exposure to the UK where many funds had negative returns in 2016.
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