Total returns as tracked by the Inrev Quarterly Asset Level Index entered negative territory for the first time since the index was launched in 2014, the European Association for Investors in Non-Listed Real Estate Vehicles said on Wednesday.
Results for Q2 were a negative -0.33%, down from 0.50% in Q1 and revealing a dip in performance for the second consecutive quarter. This represents the lowest performance tracked by the index since its inception in Q1 2014 and reflects continuing downward pressure from the Covid-19 pandemic on the European non-listed real estate industry.
This weak performance was driven by negative capital growth, which accelerated from a -0.45% decline in Q1 to a fall of -1.21% in Q2 2020. Income return also slid to 0.89%, down from 0.95% in Q1. The Inrev Quarterly Fund Index reflected a similar performance, with total returns turning negative for the first time since Q4 2012, sliding from 0.05% in Q1 2020 to -0.60% in Q2 2020.
Sectoral variances
Residential was the best performing sector, despite a drop in fund returns from 2.79% in Q1 to 1.19% in Q2, according to the Inrev Quarterly Fund Index. Retail, on the other hand, continued to slide with a fifth consecutive quarter of negative performance hitting its lowest trough since Q2 2009, with returns of -3.99% in the last quarter. The office sector moderated at 0.38% and industrial / logistics slowed to 0.62%.
Rent and liquidity
According to Inrev’s Valuations Questionnaire, rent collection remained a challenge for both open and closed end funds during Q2 2020. Some 21.5% of respondents indicated that they’d received less than half of their rent on time, an increase from 14.1% in Q1 2020. Similarly, a declining number of respondents – 66.0% in Q2 versus 78.1% in Q1 – said they’d received between 75% and 100% of rent due for the period.
More respondents expect an impact on net operating income in the future – 78.1% in Q2 2020 compared with 66.7% the previous quarter – be it an increase in rent frees, rent reduction, rent deferrals, or ‘other’.
The questionnaire also revealed an impact on the liquidity of open end funds, with 24% of respondents indicating that their fund had suspended unit subscriptions, redemptions or the issuance of a dealing NAV, up from 8.5% of respondents in June 2020. Of the suspended funds, 82.6% indicated that this was decided by an internal committee or board and only 17.4% had to close to redemptions due to a regulatory requirement.
The survey revealed how investors and managers are adjusting to the new reality, with 75% of respondents indicating a willingness to provide a degree of rent relief or abatement to their tenants. Similarly, only 33% said they were planning to revise their investment plans in light of the pandemic, as opposed to 55% when the first survey was conducted in May.
‘The Q2 results reveal the extent of the negative impacts of Covid-19 on the European non-listed real estate market,’ said Lonneke Löwik, Inrev’s CEO. ‘The effect on returns and other aspects of performance were broadly anticipated, however between January and August 2020 the volume of deals in excess of €250 mln rose year-on-year. What’s particularly heartening is the collective sense of purpose in addressing the challenges. There is clear evidence of the ‘we’re in this together’ sentiment of investors / fund managers and their respective tenants.’
