The manager of the Church of England’s £8.3bn (€9.4bn) investment portfolio has hailed a successful year for its in-house property team while warning of subdued investment returns ahead.

Church Commissioners for England recorded a 7.1% investment return overall, compared to 17.1% for 2016. This undershot its investment target of inflation plus five percentage points (9.1% in 2017).

After several years of strong performance, the fund’s real assets allocation delivered a relatively subdued 4% in 2017.

Commercial property markets continued to perform strongly, generating a 10.5% return (on a 3.5% allocation), but other markets, including London residential property and English farmland, were flatter.

Loretta Minghella, first Church estates commissioner, said: “The macro-economic environment is changing and, anticipating muted returns in the future, we will continue to develop our focus on non-traditional asset classes. Our perpetual endowment and long-term horizon is well suited to maximising returns from less liquid markets, including venture capital.”

The church fund’s largest single real estate allocation was UK rural land holdings at 8.5% of the portfolio at the end of 2017. This allocation returned 4.9% in 2017. Meanwhile residential (6.1% of the portfolio) returned 6.1%.

Its timberland investments lost 7.4%, compared with a 24.3% gain in 2016. The asset made up 3.6% of Church Commissioners’ overall portfolio at the end of 2017.

One focus of management resources was a sandalwood plantation in Australia, which was expected to generate high returns when it started delivering sustainably produced oil for use in the fragrance and pharmaceutical sectors in the late 2020s.

Another focus was renewable energy opportunities: during 2017, planning permission was granted for a 126MW wind farm in Scotland, backed by the church fund.

The Commissioners said: “We believe that prospects going forward are more muted than the recent past and we therefore retained our cautious approach, focusing efforts to create long-term value.”

They continued: “In the absence of a market correction in the near term, we will likely find ourselves in a low-returning environment for some years to come. This will mean that returns are generated principally by income and active asset management.”