Unlisted real estate funds returned 4.9 per cent in the three months to June 2014, accelerating from the 2.9 per cent achieved in the first quarter of the year as the UK market continues to strengthen.
This was the highest level of return for UK unlisted funds since March 2010.
According to the AREF/IPD UK Quarterly Property Funds Index, of the 48 funds measured, which are worth a combined GBP34.1bn, 12 delivered quarterly returns of at least 5.6 per cent to March 2014, while the majority saw returns exceeding 4.6 per cent.
In comparison, returns for bonds and equities for the three-month period were 0.9 per cent and 3.4 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 5.1 per cent.
The acceleration of returns in the unlisted sector in the latest quarter brought the annual rate of return to 14.9 per cent for the 12 months ending June 2014, reflecting the strong performance of the underlying real estate. The annualised rate has risen in each of the last five quarters.
Of the three fund types measured, specialist funds on average delivered easily the strongest performance, 6.5 per cent, against the 4.3 per cent of balanced funds and 3.2 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. Specialist funds, returning 9.2 per cent over the last six months, have now eclipsed balanced funds (7.7 per cent) as the major beneficiaries from improvements to the wider economy, while long income funds posted a significantly lower 5.5 per cent rate of return over this period.
The market showed a wide variation in performance for Q2 2014, with a spread in returns between the best and worst performing funds of 29 percentage points.
Among the specialist funds – whose returns ranged from -6.5 per cent to 22.7 per cent for Q2 2014 – both central London office and industrial portfolios once again performed strongly, but there were also strong performers among shopping centre and retail warehouse specialists, in contrast to Q1. Balanced funds delivered a narrower range of returns than specialist funds, from 2.2 per cent to 6.8 per cent for the quarter.
Specialist funds are the main users of debt among UK funds, with a level of gearing of 25.9 per cent. Balanced and long income funds are minimally geared. 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 two-thirds, from 30.6 per cent to 10.7 per cent.
John Cartwright, chief executive of AREF, says: “Balanced funds, the largest group in the Index, have captured the underlying strength of the direct UK market over the last three quarters. The individual fund figures show that the great majority of balanced funds have achieved this – the picture is very consistent across the industry.
“In contrast, the wider range of returns to specialist funds suggests that those investing in these vehicles need to understand the specific characteristics of each one. Nevertheless, a number of these funds have delivered outstanding performance in the last quarter.”
Phil Tily, executive director and head of UK and Ireland, IPD, says: “With the latest results from the IPD UK Monthly Index showing that the commercial property recovery is going from strength to strength, it is no surprise that the returns for UK unlisted funds have also surged again in Q2 2014. The next test will be whether the improving health of occupier markets, which is increasingly underpinning direct market returns, is maintained into the third quarter.”
The AREF/IPD UK Quarterly Property Fund Index, sponsored by the Association of Real Estate Funds (AREF) and PropertyMatch, is comprised of 24 balanced, 20 specialist and four long-income quarterly-valued funds, with a combined net asset value of GBP34.1bn at the end of Q2 2014.