Pan-European fund returns accelerate in Q3 2013

Pan-European real estate fund returns rose sharply in Q3 2013, reaching 1.9%, their highest quarterly level since March 2011, according to the latest results from the IPD Pan-European Quarterly Property Fund Index.

The index has now recorded three successive quarters of positive performance in 2013, good news in contrast to the negative returns for Pan-European funds registered last year. It also brings the 12-month total return to September 2013 to 2.5%, the highest 12-month performance since the beginning of 2012.

This revival in fund returns reflected a recovery in European direct real estate market performance. The IPD direct property indicator, drawn from data on the assets underlying the Pan-European index, returned 2.2%, with capital growth of 0.5%. This is the first quarter that capital values in the direct property indicator have risen since Q4 2011.

The index outperformed bonds, which returned 1.5% (J.P. Morgan GBI 7-10 yr) in Q3 2013, but trailed equities, which reverted to a positive performance of 8.2% for the same period. European property equities also registered a relatively strong quarterly return at 5.7% (MSCI Europe).

The fund level annual return for Pan-European funds is still relatively low at 2.5%, compared with 4.2% for direct property. In the last quarter of 2012, negative fund returns were compounded by the effect of leverage, which is significant for these funds, and now averages 37.3% of gross asset value (GAV). Leverage should however enhance future returns, so long as they remain positive.

European real estate returns have revived with the stabilisation of the Eurozone economy, which returned to growth in Q2 2013 after six quarters of recession. However, growth continues to be very weak and significant risks to the financial stability of the region still casts a shadow over real estate markets, particularly for the more peripheral nations.

Pan-European property funds have benefited in performance terms from their concentration in the core European markets of France and Germany, though through 2013, they may be suffering to some extent from their limited exposure to the strengthening UK market.

The IPD Pan-European Quarterly Property Fund Index is based on the full universe of core Pan-European open-ended funds that are appraised quarterly to IFRS standards with performance validated by IPD.