Unlisted real estate returns rose to 9.0 per cent in 2013, their highest in three years and a significant improvement on the 1.1 per cent delivered in 2012.
According the AREF/IPD UK Quarterly Property Funds Index, of the 49 funds measured, which are worth a combined GBP30.6bn, just three delivered a negative annual return in 2013, while 19 saw returns exceeding 10 per cent.
In comparison, returns for bonds and equities for the year were -5.2 per cent and 18.5 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, were 10.9 per cent.
Returns in the unlisted sector improved steadily throughout 2013, as growth in the wider economy fed through into the performance of underlying real estate. By the fourth quarter, returns were 4.1 per cent, their highest since March 2010, boosting overall annual performance and marking 2013 firmly as a year of recovery.
Of the three fund types measured, long income property funds delivered the strongest annual performance, 10.3 per cent, against the 8.5 per cent of specialist and 9.1 per cent of balanced 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 H2, the lead was taken up by specialist and balanced funds. These proved to be the major beneficiaries from improvements to the wider economy, returning 6.2 per cent and 6.8 per cent respectively in H2. Long income funds by comparison maintained a lower 5.5 per cent rate of return in the second half of the year.
The market remains significantly polarised on an annual basis, with the spread in performance between the best and worst performing funds still over 40 percentage points.
Among the specialist funds the Central London office portfolios topped the rankings recording each in excess of 16 per cent. Meanwhile returns for funds targeting the retail sector were more variable, most notably in the shopping centre space, where returns ranged from 11.7 per cent to -2.9 per cent for the year.
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 more than halved, from 30.6 per cent to 12.3 per cent.
John Cartwright, chief executive of AREF, says: “After a slow start to the year the performance of unlisted real estate bounced back in H2 as wider economic improvements filtered through into the performance of unlisted real estate returns.
“Despite a wide spread in annual returns, there has nevertheless been a significant overall improvement in fund performance, and as growth continues to move out of the capital and prime hot spots, 2014 may well prove to be a strong year for the unlisted sector.”
Phil Tily, executive director & head of UK and Ireland, IPD, says: “As fears around quantitative easing policies and volatility continue to surround the bond and equity markets, the rising returns of the UK unlisted sector will present another option for those looking to access the strengthening performance of UK real estate.”
The AREF/IPD UK Quarterly Property Fund Index, sponsored by the Association of Real Estate Funds (AREF) and PropertyMatch, is comprised of 25 balanced, 20 specialist and four long-income quarterly-valued funds, with a combined net asset value of GBP30.6bn at the end of Q4 2013.