Total returns for all non-listed real estate funds suffered a significant drop from 1.5% to 0.8% in local currency, according to the latest INREV Quarterly Index for the second quarter of 2011.
Capital growth moved sharply down from 1.0% to 0.2%, marking a backwards step from the first quarter of 2011, when capital growth saw a historic increase to drive up total returns overall.
Taking the figure for continental Europe, the drop is even more marked, with total returns down from 1.5% to 0.4%; and capital growth falling from 1.0% to -0.2%. “While we saw capital growth fuel positive performance in Q1, the effects of the Euro crisis and rapidly changing economic climate have finally started to impact the European non-listed real estate funds market. It’s a typical picture of the real estate sector catching up with the real economy,” said Matthias Thomas, CEO, INREV.
The majority of local markets experienced substantial losses in total returns with only France seeing an increase of 2.2% to 2.6%. The second quarter saw German returns down from 2.7% to 1.0% despite a strong performance in the first quarter. The performance in the Netherlands and Finland also deteriorated, down 0.7% to -0.8% and 3.5% to 0.8% respectively.
The overall negative capital growth in continental Europe has been partly driven by multi-country funds, which account for around 40% of the total Index and show a capital growth of - 0.2%. Multi-country funds from the Index have allocations of 17.3% to southern Europe (Italy, Spain, Portugal and Greece) where the difficulties in the general economy are particularly acute.
In the UK returns have stayed relatively stable at 1.7% in the second quarter and income returns also remained very stable at 0.8%,
The general fall in total returns was reflected in a corresponding decline in returns by style. Where core and value-added fund performance was closely matched in the first quarter of 2011, core funds are now outperforming valueadded funds at 0.9% and 0.3% respectively. There is also now negative capital growth in value-added funds at -0.3%.
“As everything is connected to market conditions, it is not surprising to see risky style funds such as highly geared and value-added funds decreasing,” said Casper Hesp, Senior Research Manager, INREV. “Gearing and styles go hand in hand so now that capital values are coming down, highly geared funds are also underperforming. Contrary to what we saw in the first quarter of the year, funds with 60% gearing or more have experienced a brutal decrease in total returns to - 0.5% from 2.4% and negative capital growth of -0.8%.”
Hesp continued: “It isn’t all bad news as there is still income return to account for. Total income returns have been stable which confirms that non-listed real estate funds still remain an important asset class. However, given the natural lag in real estate, the question remains whether the non-listed real estate sector will endure a disproportionately heavy hit in the remaining quarters of 2011.”