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Unlisted UK real estate fund returns stay strong at 2.9 per cent in Q1 2014

Unlisted real estate funds returned 2.9 per cent for the three months to March 2014, falling back somewhat compared to 4.1 per cent for the last quarter of 2013.

However, the two most recent quarters recorded the highest levels of return for UK unlisted funds since June 2010.
According to the AREF/IPD UK Quarterly Property Funds Index, of the 48 funds measured, which are worth a combined GBP33.2bn, four delivered quarterly returns of at least six per cent to March 2014, while the majority saw returns exceeding three per cent.
In comparison, returns for bonds and equities for the three-month period were 2.5 per cent and -1.5 per cent respectively (JP Morgan 7-10 year/MSCI UK), while returns for direct commercial property, as measured by the IPD UK Monthly Property Index, stood at 3.9 per cent.
Although returns in the unlisted sector fell back somewhat in the latest quarter, the strong performance of underlying real estate was reflected in a continued rise in the annual rate of return, which reached 11.4 per cent for the 12 months ending March 2014. The annualised rate has risen in each of the last four quarters.
Of the three fund types measured, balanced property funds delivered the strongest performance, 3.3 per cent, for the second quarter in succession, against the 2.5 per cent of specialist funds and 2.2 per cent of long income funds.
During the low growth environment of the first half of 2013, long income funds delivered the strongest returns, but as growth in underlying direct property values increased during the second half of 2013, the lead was taken up by balanced and specialist funds. These have proved to be the major beneficiaries from improvements to the wider economy, returning 7.7 per cent and 6.9 per cent respectively over the last six months. Long income funds posted a somewhat lower 5.1 per cent rate of return over this period.
The market shows significant variation on a quarterly basis, with a spread in performance between the best and worst performing funds of 13 percentage points for Q1 2014.
Among the specialist funds, both Central London office and industrial portfolios emerged strongly in Q1 2014, with each group containing two funds which returned at least six per cent over the quarter. Amongst the specialist funds targeting the retail sector, those focused on retail warehouses nearly all outperformed those in the shopping centre space, none of which returned more than 1.4 per cent over the quarter.

Overall, gearing as a percentage of GAV continued to decline, in part due to rising asset values, but also as funds have continued their policy of deleveraging. Since June 2009, the average level of gearing has fallen by nearly two-thirds, from 30.6 per cent to 11.6 per cent.
John Cartwright, chief executive of AREF, says: “Balanced funds, which form the largest group of portfolios in the Index, have really come into their own over the last two quarters. These funds directly reflect the strength of underlying UK market returns for their healthy performance, as most have little or no gearing.”
“As the UK property recovery becomes more broadly established across the UK regions, these funds should continue to show favourable levels of return.”
Phil Tily, executive director and head of UK and Ireland, IPD, says: “The UK real estate recovery is now firmly established, with four quarters of solid performance recorded for both the direct and unlisted markets. With forecasts for the UK economy improving from month to month, rental growth is now spreading to property across the country, a trend which is reinforcing performance for direct and unlisted funds alike.”

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