Europe's non-listed institutional real estate funds produced a very strong average total investment return of 20.9% in 2006, the annual INREV Index results from the industry's representative body showed.
"This is a very high investment return. One would expect the median long-term figure for the industry to be somewhere in the range of 10% to 14%. I hope we see a gradual cooling off in the market as this can't be sustained indefinitely," INREV Chief Executive Lisette van Doorn commented at the association's annual conference in Madrid.
"Capital growth is expected to slow down with the current very low yields (rental income as a proportion of capital value) and such high levels of total returns can't be supported by rental growth alone. However, the sample does include a lot of funds in their mature phase, where they normally generate higher returns than at the start," she added.
The analysis of 173 institutional vehicles with assets of €82.8 billion was compiled by London-based fund benchmarker Investment Property Databank (IPD).
The INREV Index showed average total investment returns of 22% in 2005, although the comparative data needs to be treated with caution as the Index base is still "unfrozen." This means the sample composition for previous years will change and the number for 2005 is now different from what it was last year.
"I'm very happy to see the big improvement in the quality of the data sample we've achieved, as we added €13 billion in institutional assets in 2006 18% up on the previous year. More fund managers are delivering their data to us and we're seeing the results in the accuracy of measuring the industry's performance and the robustness of the numbers," Van Doorn said.
At the country level, Norway (29.4%), France (26.3%), Germany (25.1%) and the UK (21.4%) delivered the highest level of total investment returns in local currency terms.
Non-listed real estate fund yields seem to be getting lower across Europe and the average level of gearing in the vehicles is still very modest. Distribution yields (paid by funds to shareholders) declined to 2.4% in 2006 from 2.9% in 2005 in the UK, to 6.2% from 7.7% in the Netherlands and to 1.1% from 3.0% in France. This is possibly due to the ongoing increase in the value of the funds, which reduces the percentage dividend payout.
No real estate sector persistently outperformed for all countries last year. Retail was the best performing sector for cross-border funds with 20.4% returns (UK retail also performed 20.4%), while offices were the best performing sector in the UK with returns of 30.4%.
Source: Bellier Financial