Signs of recovery and renewed investor confidence in non-listed real estate in Q4 2020

Results from the latest INREV Pan-European Quarterly Asset Level Index have revealed a steady improvement in performance for Q4 2020, with total returns reaching 1.92 per cent – a significant uplift compared with the 1.21 per cent seen in Q3.  

Capital growth improved to 1.00 per cent on a quarterly basis compared to 0.27 per cent in Q3. Income return dipped slightly to 0.91 per cent, versus 0.94 per cent registered in Q3. These results reflect returning investor confidence, following a year of great uncertainty that saw annual total return of only 3.41 per cent and disruption for the European non-listed real estate industry.  

The INREV Quarterly Fund Index tells a similarly positive story, with a total return of 1.70 per cent in Q4 2020, increasing from the 0.96 per cent in the previous quarter. Investors’ continued preference for core strategies was reflected in improving total returns for core funds which hit 1.80 per cent, up from 1.08 per cent in Q3.  

Value added funds remained in negative territory, posting a total return of -0.06 per cent. However, this is still an improvement on the previous quarter, up from -0.73 per cent. The annual 2020 results highlight the diverging stories of core versus value added sentiment even more, with total returns of 2.71 per cent and -5.29 per cent respectively.  

From their weak position at a total return of -0.11 per cent in Q3 2020, UK-focused funds made a significant rebound with capital growth hitting positive territory in Q4 at both the fund level (0.60 per cent) and the asset level (0.48 per cent) for the very first time since Q2 2019 and Q4 2018, respectively. This move back into positive territory came largely as a result of strong performance in the industrial/logistics sector, which accounted for 26.7 per cent of the INREV UK Quarterly Fund Index and 33 per cent of the INREV UK Asset Level Index, as well as the residential and student housing sectors. 

However, the 2020 annual UK returns remained in negative territory in the case of both of the aforementioned indices. The upward trajectory for the UK points to renewed investor confidence following the long-anticipated Brexit agreement, the recalibration of values, and the arrival of new or relatively new occupiers into the UK office market. In the tailwind sectors, such as industrial/logistics and residential/living, investors are now actively seeking new opportunities for long-term growth, while value added and opportunistic strategies are targeting the heavily repriced sectors, such as retail and hospitality.  

Despite the UK’s bounce-back, the 2020 annual UK returns remained in negative territory in the case of both of the above-mentioned indices, leaving it behind other European markets and single country strategy funds. Germany stays at the top of the single country strategy leader board, achieving a Q4 total return of 2.94 per cent in the INREV Quarterly Fund Index and 4.27 per cent in the INREV Germany Quarterly Asset Level Index, reinforcing investors’ ongoing interest in this market. The annual total returns were reported at above 7.5 per cent according to both measures. Similarly, France and the Netherlands also reported robust results, with quarterly total returns between 1.99 per cent and 1.73 per cent in the INREV Quarterly Asset Level Index, bringing each of these countries’ annual total returns for 2020 to 4.92 per cent, and 6.03 per cent respectively.  

According to the INREV Pan-European Quarterly Asset Level Index, the end of the year saw improved performance across several sectors. Industrial/logistics was the best performing segment yet again, delivering a total return of 5.70 per cent, compared to 3.09 per cent recorded in Q3 2020. The residential and office sectors reported total returns of 1.88 per cent and 1.84 per cent respectively for Q4. The retail sector showed the sixth consecutive quarter of negative performance, with a further deterioration in Q4 to a total return of -1.79 per cent versus -1.09 per cent in Q3 2020, according to the INREV Quarterly Asset Level Index, and yet another dip in capital growth to -2.73 per cent.  

However, there is large dispersion within the sector, with Q4 total returns of 3.36 per cent for supermarket/superstores, while at the other end of the spectrum, shopping centres reported a negative performance of -3.61 per cent. 

Rent collection improved for both open and closed end funds during Q4 2020, according to INREV’s Valuations Questionnaire. In all, 89.2 per cent of respondents indicated that they’d received 75-100 per cent of their rent on time, an increase from 87.9 per cent in Q3 2020. The Q4 2020 Valuations Questionnaire provided further evidence of returning confidence showing a steep decline in managers applying the material uncertainty clause to their funds. This rate has fallen consistently over four consecutive quarters, hitting just 18 per cent in Q4 2020, down from 27 per cent the previous quarter and a record high of 57 per cent in Q1 2020.  

Similarly, not a single respondent indicated that their funds remain suspended to unit subscriptions and voluntary application of redemptions. This is a considerable improvement compared with 23.2 per cent of respondents in Q2 and 5.9 per cent in Q3.  

Iryna Pylypchuk, INREV’s Director of Research and Market Information, says: “The latest results are reassuring, confirming a cautious return of confidence after a year of uncertainty brought about by the Covid-19 pandemic. The real estate market appears to be turning a corner with a more positive outlook on both the investor and the occupier side, albeit the latter may take longer to recover and will most likely see a gradual change of occupier profile. 

“Creditable performances in sectors such as industrials/logistics, residential and most living sectors, and gradually, offices, and in core markets like Germany, Netherlands and France, reinforce the picture of an asset class returning to stability, underpinned by renewed investor appetite for new opportunities. As we move into 2021, the European real estate market reveals a gradually expanding investable universe, with a large dispersion of performance and a greater choice of risk return opportunities than we saw pre-Covid.”