UK - Worsening economic conditions in 2011 enabled unlisted property funds in the UK to outperform equities and property REITs, but their performance remained sluggish compared with direct commercial property, according to a study by IPD.

IPD found that pooled property funds delivered 1.2% in the fourth quarter of 2011, as returns continued to slow, producing an annual return of 7.1%, while direct commercial property returned 8.1%.

By comparison UK equities fell by 3.5% over the year, while property REITs lost 8.8%.

IPD said capital returns for pooled funds remained positive in the fourth quarter at 0.4%, compared with the underlying direct property market, which slid into negative territory.

Malcolm Hunt, director of Ireland and UK client services at IPD, explained that an increasing proportion of the 56 contributing funds experienced capital depreciation.

However, average levels of gearing still fell for the 11th consecutive quarter, down to 3% for balanced and 32% for specialist funds.

Hunt said: "LTV ratios are hanging in the balance in the current conditions, and any further declines in value, which are becoming more widespread across the faltering market sectors, may lead to ratios creeping up again."

According to IPD, although specialist funds outperformed their balanced counterparts in the first half of 2011, the situation changed drastically in the second half of the year.

It found that specialist funds' strong performance in the first six months had been primarily due to their exposure to strong growth areas in the market - particularly shopping centres and retail warehouses.

"A slowdown of growth in prime areas in Q3, and heavy exposure by some of the specialist funds towards, by then, suffering markets, meant that balanced funds, with their even spread across the sectors and lower gearing have seen slower declines in fund returns of late," Hunt said.

"That said, by Q4, returns for the two fund types narrowed to 10 basis points, as the slowdown became more uniform, effecting balanced (1.3%) and specialist (1.2%) funds alike."