EUROPE - Multi-country and leveraged real estate funds fared the worse amid wider poor performance in the last quarter of 2011, according to INREV.

The INREV quarterly index, which tracks data from 251 funds, recorded a fall in overall returns from 0.7% in Q3 to 0.2% in Q4 - largely as a result of a lagged response to macro instability within the euro-zone.

Multi-country funds, which have an average allocation of 20% to southern European markets, returned -0.6% as a result. Italy was the worst performing market in Q4, with returns of -1.9%.

Casper Hesp, research and market information director at INREV, said it was clear the results were delayed response to the macro economic picture. "Real estate is lagging behind the real world at the moment," he said.

Capital growth in continental Europe declined from -0.4% to -1.2% between Q3 in Q4, driving an overall decline in capital growth from -0.1% to 0.9%.

Highly geared funds - those with more than 60% loan-to-value rations - were at a particular disadvantage, with a decline in capital growth to -5.6% pushing down the overall percentage return to -5.3%.

"There isn't a linear relationship between leverage and performance but, if a fund is highly geared, it's going to go down more as a result of falling capital values," said Hesp.

The market could experience further declines over the next 18 months as more funds seek re-financing, he added.

Despite a drop in capital growth, described by INREV as "dramatic", income remained relatively stable.

"It certainly isn't all bad news," said Hesp. "Income streams have remained quite stable despite challenging market conditions. That's what makes real estate an attractive asset class."

The income return on core funds, for example, increased from 0.6% in the first quarter to 1.2% in Q4, despite a decline in total return from 1.6% to 0.5% over the same period. For value-added funds, income return increased from 0.7% to 1% against a downward total return shift from 1.2% to -0.5%.