EUROPE - Institutional European real estate funds on average delivered a negative euro-denominated return of -1.6% in 2009. But there was a huge variance of investment performance among funds over the 12-month period, according to Investment Property Databank (IPD).

The bi-annual IPD European Pooled Property Fund Indices (e-PPFI), based on a fund universe of 245 predominantly core and value-added funds representing a total net asset value of €74.7bn, returned -4.2% over the first six months of last year.

This was subsequently reversed by a positive six-month return in the second half, at 2.7%, although the recovery was insufficient to lift returns into positive territory over the full calendar year.

A wide spectrum of annual total returns, ranging from a positive 43.6% to a negative -52.0%, was driven, among other things, by improvements in individual underlying property markets, currency swings, impacts of leverage and different geographic and sector investment strategies, IPD said.

The relative outperformance of the 63 top quartile performing funds - comprising 32 balanced and 31 specialist funds - against the -1.6% e-PPFI benchmark was predominantly driven by geography of investments.

Of the 54 single country-focused funds (investing more than 85% in one country) covered, 43 invested in the UK; a market that delivered an annual total return of 3.5% in 2009, following a dismal -22.1% in 2008.

"UK funds benefited from a dramatic reversal of fortunes over the second half of last year," said Cameron McVean, head of fund services at IPD.

"No doubt some outperformance came from managers making good tactical calls ahead of the market recovery mid-way through last year, which saw a cumulative 9.8% capital growth over the second half."

Currency swings in 2009 had significant repercussions for euro-denominated investors investing in UK funds.

The first six months saw sterling strengthen against the euro during a period in which capital values were still in decline, meaning investors suffered from negative property performance but benefited from a positive currency impact when returns were converted into euros. The second half of last year saw the reversal of this position.

Reflecting the currency trends, average returns for all European institutional pooled property funds over the six months to June 2009 were -15.6% in sterling but were -4.2% in euros.

In the second half of the year, when the currency effects reversed, a six-month 7.2% sterling total return was eroded by sterling's weakness to 2.7% in euros.

The top quartile fund performers also included five French and Italian-focused funds, one German-only fund, five pan-European funds and two Nordic funds.

The outperformance of French-focused funds, which invested predominantly or entirely in French offices, may come as a surprise given the double-digit annual capital depreciation experienced by the sector in 2009.

McVean said the results suggested "there were pockets of value to be found within the French market", despite its overall -3.5% annual return last year.

The range of euro-denominated total returns among bottom quartile funds was -11.7% to -52%, with two-thirds of funds in this category specialist vehicles invariably using leverage.

"Much greater leverage was applied by bottom quartile funds; only three funds in this pool were entirely ungeared, while more than two-thirds used 60% or more compared to an all fund average of 33.0%," McVean said.

"The majority of bottom quartile funds were closed-ended, single sector specialists which tend to experience greater cyclical volatility."

IPD's European institutional-only fund universe consists of 17 pan-European funds (€3.2bn), 68 UK-focused funds (€27.3bn), 24 French funds (€7.2bn), 15 German funds (€6.2bn), 41 Italian funds (€9.1bn) and 80 other single country and regional-specific funds (€21.7bn).