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Phil Tily, IPD managing director for the UK and Ireland

Long income and alternative funds outperform in the UK unlisted sector in 2012

UK unlisted property funds returned 1.1 per cent in 2012, according to the AREF/IPD UK Quarterly Property Fund Index, as underlying falls in direct property values impacted on returns.

Returns slowed in the fourth quarter of 2012 to their lowest since 2009, just remaining positive, a result of balanced fund performance slowing to -0.4 per cent, and specialist funds rising slightly, to 0.4 per cent.

Over the course of the year balanced fund performance dropped away significantly, delivering negative returns for the last two quarters, leading to an annual return of 0.2 per cent. Specialist fund returns, which benefited from higher concentrations of assets in specific sectors, remained relatively consistent, averaging 1.1 per cent for the year.

Q4 2012 was the first quarter the index separated out the performance of Long Income Property Funds into a sub-index, responding to the increased interest amongst investors looking to secure long-leased assets with secure cash flows. The sub-index, which consists of four funds investing across the UK, returned 6.9 per cent in 2012, a considerable outperformance compared to specialist and balanced funds.

Phil Tily, IPD managing director for the UK and Ireland, says: “As the market deteriorated over 2012, pension funds and other investors keen to protect their cash flows have been increasingly focused on long income assets, which, in a market where the average newly signed lease is under five years, are increasingly sought after. Long income funds have been in a minority in maintaining positive capital growth throughout 2012.”

Alternative real estate sector funds, targeting leisure, residential and healthcare assets also returned well over 2012, with five of the six alternative funds measured delivering returns in excess of the all funds average, while four of the top five funds of 2012 specialised in alternatives.

John Cartwright, chief executive at AREF, says: “Diversification into new property sectors has been a key theme of 2012, as investors explored new assets with new drivers of returns – which, as a result, still delivered during a downswing.

“Though 2012 has been a difficult year for the unlisted sector, and despite the uncertainty created by the euro, and the negative impacts of austerity cuts in the UK, the majority of funds are still delivering long-term positive returns. Indeed, even in 2012, 39 of the 53 funds measured delivered positive total returns.”     

Equities and property rquities returned 10.2 per cent and 30.5 per cent respectively across the year, far outdistancing the returns of both the direct and unlisted property sectors. The direct property market, as measured by the IPD UK Monthly Property Index, delivered 2.4 per cent.

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