UK property funds provide highest quarterly returns since 2010

Non-listed real estate funds returned 4.9% in the three months to June 2014, accelerating from the 2.9% achieved in the first quarter of the year as the UK market continues to strengthen, IPD has reported.

This was the highest level of return for UK non-listed funds since March 2010. According to the AREF/IPD UK Quarterly Property Funds Index, of the 48 funds measured, which are worth a combined £34.1 bn, 12 delivered quarterly returns of at least 5.6% to March 2014, while the majority saw returns exceeding 4.6%.

In comparison, returns for bonds and equities for the 3-month period were 0.9% and 3.4% respectively (JP Morgan 7-10 year/MSCI UK), while returns for direct commercial property, as measured by the IPD UK Monthly Property Index, stood at 5.1%.

The acceleration of returns in the non-listed sector in the latest quarter brought the annual rate of return to 14.9% for the 12 months ending June 2014. The annualised rate has risen in each of the last five quarters.

BEST PERFORMERS
Of the three fund types measured, specialist funds on average delivered easily the strongest performance, 6.5%, against the 4.3% of balanced funds and 3.2% of long income funds.

During the low growth environment of the first half of 2013, long income funds delivered the strongest returns, but as growth in underlying direct property values increased during the second half of 2013, the lead was taken up by balanced and specialist funds. Specialist funds, returning 9.2% over the last six months, have now eclipsed balanced funds (7.7%) as the major beneficiaries from improvements to the wider economy, while long income funds posted a significantly lower 5.5% rate of return over this period.

The market showed a wide variation in performance for Q2 2014, with a spread in returns between the best and worst performing funds of 29 percentage points.

Among the specialist funds – whose returns ranged from -6.5% to 22.7% for Q2 2014 - both central London office and industrial portfolios once again performed strongly, but there were also strong performers among shopping centre and retail warehouse specialists, in contrast to Q1. Balanced funds delivered a narrower range of returns than specialist funds, from 2.2% to 6.8% for the quarter.

Specialist funds are the main users of debt among UK funds, with a level of gearing of 25.9%. Balanced and long income funds are minimally geared. Overall, gearing as a percentage of GAV continued to decline, in part due to rising asset values, but also as funds have continued their policy of deleveraging. Since June 2009, the average level of gearing has fallen by two-thirds, from 30.6% to 10.7%.

John Cartwright, CEO of AREF, said, 'Balanced funds, the largest group in the Index, have captured the underlying strength of the direct UK market over the last three quarters. The individual fund figures show that the great majority of balanced funds have achieved this – the picture is very consistent across the industry.

'In contrast, the wider range of returns to specialist funds suggests that those investing in these vehicles need to understand the specific characteristics of each one. Nevertheless, a number of these funds have delivered outstanding performance in the last quarter.'