Returns climb for UK unlisted real estate funds in Q3

By Bridging Loan Directory -


Positive sentiment in the UK property market drove returns for unlisted real estate funds to a two and a half year high in the three months to September 2013, according to AREF/IPD UK Quarterly Property Fund Index.

The index, which measures the performance of 50 unlisted funds worth over GBP29bn, showed that overall total returns increased to 2.2%, driven by improvements in underlying direct property asset values, which also rose by 1.4%,  their largest quarterly growth since March 2011.

Over the same three months, bonds delivered 0.0% and equities 4.9% (JP Morgan 7-10 yr/MSCI UK), while direct commercial real estate, as measured by the IPD UK Monthly Property Index, returned 2.9%.

Annual returns to September 2013 for all unlisted funds climbed to 4.8%, over double the 2.3% delivered for the twelve months to September 2012.

Gearing as a percentage of GAV continued to decline for funds overall, partly due to rising asset values, and as funds have continued their policy of deleveraging. Since June 2006, the average level of gearing has more than halved from 30.6% to 13.9%.

Balanced funds saw the largest growth in returns, from 1.4% in Q2 to 2.4% in Q3, due to large increases in the value of underlying properties (showing 1.7% for the quarter). Of the 25 balanced funds measured by the index, just four delivered a return of less than 2.0%, while the spread in returns across funds was less than 3.0%.

Specialist funds provided a more diverse performance, with returns improving by just 10bps in Q3 to 1.8%. Three of the specialist funds measured still demonstrated negative quarterly returns, while the return spread of the 21 funds was over 14%.

The more widespread recovery currently seen in the direct property market is leading to growing returns for specialist funds with exposure to some of the more traditional forms of real estate, with office and retail warehouse funds now all seeing positive rates of returns.

The attraction of the long income funds is evidenced by them continuing to deliver the strongest rates of return for the quarter.  Their return of 2.6% was however down on the performance level recorded in the second quarter.

John Cartwright, Chief Executive of AREF, said:

“Long-income funds, which for a while outpaced the returns of their balanced and specialist counterparts, are designed to provide stability. This means that in a downturn, they are strong defensive assets, but this may come at the cost of growth during an upswing.

“The rebound in performance of the traditional sector funds, those focusing on office, retail and industrial properties, is perhaps the most promising news this quarter, and these sectors are starting to see the fruits of economic growth filter out of London and confidence return to the UK’s regional property markets.”

Phil Tily, Executive Director & Head of UK and Ireland, IPD, said:

“This month we witnessed a transition in the direct property market – with capital growth now the largest component of total returns – and that strengthening dynamic is feeding through into the unlisted sector.”

The AREF/IPD UK Quarterly Property Fund Index, sponsored by the Association of Real Estate Funds (AREF) and PropertyMatch, is comprised of 25 balanced, 21 specialist and four long-income quarterly-valued funds, with a combined net asset value of GBP29.5bn at the end of Q3 2013.