Unlisted property funds outperformed equities and property REITs in 2011, but fell short of the returns delivered from direct commercial property over the year.
According to the AREF/IPD UK index, pooled property funds delivered 1.2% in the fourth quarter of 2011, as returns continued to slow.
This contributed to an annual return of 7.1%.
Direct commercial property, measured by the IPD UK Monthly Index, returned 8.1%, equities -3.5% and property REITs -8.8%.
Malcolm Hunt, director of UK and Ireland client services, said, “Pooled fund capital returns remained positive in the fourth quarter at 0.4%, in contrast to the underlying direct property market which trended into negative territory.
“An increasing proportion of the 56 contributing funds experienced capital depreciation, but average levels of gearing still fell for the eleventh consecutive quarter, down to 3% for balanced and 32% for specialist funds.
“LTV ratios are hanging in the balance in the current conditions, and any further declines in value, which are becoming more widespread across the faltering market sectors, may lead to ratios creeping up again.”
The index also revealed that specialist funds outperformed their balanced counterparts in the more optimistic first half of the year, due to their exposure to prime, strong growth areas in the market – especially shopping centres and retail warehouses.
However, the worsening economic conditions after Q2 led to a reversal in fortunes.
Hunt added: “A slowdown of growth in prime areas in Q3, and heavy exposure by some of the specialist funds towards, by then, suffering markets, meant that balanced funds, with their even spread across the sectors and lower gearing have seen slower declines in fund returns of late.
“That said, by Q4 returns for the two fund types narrowed to 10 basis points, as the slowdown became more uniform, effecting balanced (1.3%) and specialist (1.2%) funds alike.”
The AREF/IPD UK PPFI – sponsored by the Association of Real Estate Funds (AREF), Linklaters and PropertyMatch – is comprised of 26 balanced and 30 specialist quarterly-valued funds, with a combined net asset value of £28.7bn at the end of Q4 2011.
bridget.oconnell@estatesgazette.com
