EUROPE - Returns for European non-listed real estate funds fell sharply in the second quarter of this year as the effects of the euro crisis began to bite.
Total returns for all non-listed real estate funds fell to 0.8% in local currency in the three-month period from 1.5% in the previous quarter, according to data from INREV's quarterly index for April to July.
Matthias Thomas, chief executive, said: "While we saw capital growth fuel positive performance in Q1, the effects of the euro crisis and rapidly changing economic climate have finally started to impact the European non-listed real estate funds market.
"It's a typical picture of the real estate sector catching up with the real economy."
Capital growth slowed sharply, measuring 0.2% in the second quarter after 1% in the first quarter.
In Continental Europe, total returns were down at 0.4% compared with 1.5% in Q1, with capital values diminishing by 0.2% in the second quarter, having grown by 1% in the first.
Most local markets saw substantial falls in total returns with only France seeing an increase to 2.2% from 2.6%.
In Germany, returns dropped to 1% from 2.7%, while in the Netherlands and Finland returns fell respectively to -0.8% from 0.7% and to 0.8% from 3.5%.
In the UK, meanwhile, returns stayed relatively stable at 1.7% in the second quarter, with income returns also remaining stable at 0.8%.
The overall falls in capital values in continental Europe have been partly driven by multi-country funds, which account for around 40% of the total index, INREV said.
Between April and July, multi-country funds saw capital values dwindle by 0.2%.
Multi-country funds in the index have allocations of 17.3% to southern Europe - Italy, Spain, Portugal and Greece - where economic difficulties are particularly acute, INREV said.
Looking at funds by style, the data showed that while core and value-added fund performance was very similar in the first quarter, in the second quarter, core funds outperformed value-added funds at 0.9% and 0.3%, respectively.
Value-added funds also saw declines in capital values of 0.3% in the second quarter.
Casper Hesp, senior research manager at INREV, said: "As everything is connected to market conditions, it is not surprising to see risky style funds such as highly geared and value-added funds decreasing.
"Gearing and styles go hand in hand, so now that capital values are coming down, highly geared funds are also underperforming. Contrary to what we saw in the first quarter of the year, funds with 60% gearing or more have experienced a brutal decrease in total returns to -0.5% from 2.4% and negative capital growth of -0.8%."
But it was not all bad news, as there was still income return to account for, he said.
"Total income returns have been stable, which confirms that non-listed real estate funds still remain an important asset class," he said.
"However, given the natural lag in real estate, the question remains whether the non-listed real estate sector will endure a disproportionately heavy hit in the remaining quarters of 2011."
INREV is the European Association for Investors in Non-listed Real Estate Vehicles. The quarterly index took in data from 248 funds.
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