INREV: Capital growth fuels positive performance for non-listed real estate funds in continental Europe (EU)

Capital growth from non-listed real estate funds in continental Europe has increased to 1.0% in local currency, according to the latest INREV Quarterly Index for the first quarter of 2011.

This marks a turnaround on the last four quarters, when performance in continental European markets was driven by income returns and capital growth rates stagnated.

Total returns were 1.6% - the same as in the fourth quarter of 2010. Income returns were typically lower due to higher year-end dividends paid out by continental European funds in the last quarter of 2010.

"The resurgence of capital values in continental Europe reflects the broader economic recovery in many of these markets. Our Quarterly Index suggests some encouraging news for investors but it is too early to confirm this as an upward trend for the remainder of 2011," said Casper Hesp, Senior Research Manager, INREV.

Total European returns for the first quarter of 2011 were 1.6%, marginally down from 1.9% in quarter four 2010. Total returns have been between 1.6% and 1.9% for the fourth quarter in a row. This is testament to a general stabilization of markets in the non-listed real estate funds sector.

"The strengthening capital growth shown in the INREV Quarterly Index for the first quarter of 2011 mirrors what we are seeing in the non-listed Pan-European funds we have invested in on behalf of our clients," commented Catriona Allen, co-chair of the INREV Performance Measurement and Benchmarking Committee and Fund Manager at Aviva Investors Real Estate Multi Manager.

National strength
Germany and France have both demonstrated strong performances in the first quarter of 2011 with each hitting capital growth of 1.9%, and total returns of 2.7% and 2.2% respectively. The results echo the positive sentiment toward these markets expressed by investors in the INREV Investment Intentions Survey 2011, published at the beginning of this year when German retail and French office investments were cited as preferred options.

Multi-country funds, which account for 41% of the INREV Index by number of funds, also made a significant contribution to overall performance figures for the first quarter of 2011 with capital growth of 1% and total returns of 1.6%.

In the UK returns for the first quarter of 2011 were slightly lower (1.6%) than in the last quarter of 2010 (2.4%) and are now comparable with continental Europe. Income return remained very stable at 0.8%. The picture in the UK is one of stabilization following a period of relative volatility between 2007 and 2010.

Sector and style
Funds invested in the retail and industrial/logistics sectors put in solid performances with total returns of 2.1% and 2.2% respectively. This is ahead of the residential (1.5%), multi-sector (1.4%) and office (0.8%) sectors. Core funds remained stable with a total return of 1.7%.

Just like the overall Index, total returns have been stable for the fourth quarter in a row with returns between 1.6% and 1.8%. There was more volatility in value added style funds where total returns dropped to 1.2% from 2.5% in the fourth quarter of 2010.

"Contrary to expectation, the difference in performance between core and value added funds cannot be explained by the average gearing level used by these funds. In fact, highly-geared funds outperformed low-geared funds, which shows that funds are benefiting from the positive effect of debt in an improving market," said Hesp.

Funds with a gearing ratio of up to 40% delivered returns of 1.5% while funds with a gearing ratio of over 60% hit returns of 2.0%.

This edition of the INREV Quarterly Index captured data from 246 funds, including 17 new funds that joined the Index for the first time. The data also shows that almost 85% of funds were externally valued, significantly improving the integrity of the Index.

"It is very encouraging to see the index sample size continue to increase over recent quarters. Although the index cannot be used as a benchmark, the rising number of participants makes it an increasingly robust

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