Returns for European non-listed real estate rebound into positive territory in Q3 - Inrev

Recording a total return of 1.20%, these results reflect the easing pressure from the Covid-19 pandemic on the European non-listed real estate market, the industry body said.

The improved performance was driven largely by positive capital growth, which recorded a quarter-on-quarter increase of 146 bps to 0.26%, with the income return increasing to 0.94%, a slight improvement on the 0.88% registered in Q2.

The INREV Quarterly Fund Index reflected a similar performance, with an improved quarterly return of 0.89%, increasing from -0.67% recorded in Q2 2020. Although far from pre-pandemic levels, uplifts were recorded across many strategies. Core funds drove the performance, posting a total return of 0.97%, up from -0.56% in Q2. The performance of value added funds also improved but remained in negative territory with a total return of -0.47%.

Improved regional performance
Main European markets delivered a healthy performance in Q3 2020, according to the Pan-European INREV Asset Level Index. Germany, France and the Netherlands all reported quarterly total returns of between 1.67% and 1.77%, bringing their 12-month rolling total average returns to a healthy 9.37%, 7.35%, and 5.78% respectively.

Despite delivering a total return of 0.34% in Q3 2020, the UK continued to lag behind other countries, with capital growth remaining negative. The improvement from -1.94% in Q2, was largely driven by a strong performance in the industrial and logistics sector, and less negative results in retail with both sectors accounting for over 50% of the UK index.

The geographical differences in the performance of non-listed real estate seem to reflect, at least to some extent, the liquidity of the direct markets. Transaction volumes over the first three quarters of 2020 have decreased across the board, according to Real Capital Analytics. However, for Germany, the decline is relatively limited at -4.3% compared to the same period in 2019 versus the -17.9% decline for Europe overall.

Sectorial variances
According to the Pan-European INREV Quarterly Asset Level Index, performance improved across all main sectors in Q3. Industrial and logistics was the best performing segment, delivering a total return of 3.08%, compared to just 0.11% recorded in Q2 2020. The residential and office sectors reported Q3 total returns of 1.82% and 1.07%, respectively.

After five consecutive quarters of negative performance, the retail sector delivered a total return of
-1.10% in Q3, up from -3.04% in the previous quarter.

Stronger recovery across rent and redemptions
According to INREV’s Valuations Questionnaire, rent collection improved for both open and closed end funds during the previous quarter. Some 88% of respondents indicated that they’d received between 75% and 100% of their rent on time, an increase from 66% in Q2 2020. Similarly, a greater number of respondents – 77% in Q3 compared to just 55% in Q2 – said they’d received between 75% and 100% of rent due for the period.

The questionnaire also revealed a strong, positive impact across open end funds in Q3, with only 6% of respondents indicating that their funds remain suspended to unit subscriptions, redemptions or the issuance of a dealing NAV. This is notably down compared with 23% of respondents in Q2.

Iryna Pylypchuk, INREV’s director of Research and Market Information said: ‘The latest results paint a generally improved picture of returning investor confidence, with pockets of outperformance across markets and sectors. Germany led the performance as a target single country strategy, while industrial and logistics and residential segments performed well across all markets, including the UK which remains the obvious weak link in terms of overall performance. A significant decline in the use of material uncertainty clauses is an early indicator that we should see an uptick in investment deal volumes and liquidity both in Q4 2020 and into 2021. ‘