INREV: Fund performance and capital raising fall and investors act with caution

Non-listed real estate funds have witnessed a drop in performance and the level of capital being raised, while investors are heading for the relative safety of core funds in the strongest performing regions such as the UK, according to the INREV Annual Index 2011 and the INREV Capital Raising Survey 2012.

Between them, the reports highlight a fall in total returns from 7.4% in 2010 to 3.7% in 2011 and an estimated 9% drop in the level of capital raised.

But both the INREV Index and the INREV Capital Raising Survey also reveal a solid performance in the UK, backed by strong investor interest in this region. Despite the large drop in total returns from 14.9% to 5.7%, UK funds outperformed the rest of continental Europe (with the exception of France, which performed at 6.8%).

The UK was also the most important source of capital in 2011 with investors committing €2 billion, substantially more than their counterparts in Germany who committed €1.3 billion. Furthermore, the UK was the preferred destination for investor capital receiving 28% (or €2.8 billion) of the total investments. In Germany, on the other hand, €1.8 billion was invested.

"The headlines on performance and capital raised should come as no real surprise. We're facing turbulent and uncertain times. However, the news on the UK is clearly positive for those invested there," said Casper Hesp, Director Research and Market Information, INREV.

Preference for core and retail
Two further trends are echoed by both reports.

The INREV Index shows that core funds outperformed value added funds with total returns of 4.3% compared with 1.1% for value added funds. Similarly, the INREV Capital Raising Survey reflects a massive weighting toward core funds for which 86% of capital was raised, while opportunity and value added funds attracted only 8% and 6%, respectively.

Both reports show retail standing out as a sector. Though down from 11.7% in 2010, retail performed better than other sectors in 2011 with returns of 4.3%. It also attracted the lion's share of capital from investors with 36% of all investments being made in this sector.

"Investors seem to have stuck to strategies, countries and sectors they know and trust. In the main, they're adopting an understandably cautious approach," commented Hesp.

Anomalies and variations
Despite the generally consistent picture from both reports, the INREV Index and the INREV Capital Raising Survey pinpoint some intriguing anomalies.

Performance of multi-country funds is shown in the INREV Index to be low at 2.2% - a factor that has contributed to the overall poor total returns in continental Europe. This is partly owing to the fact that 19% of the total assets of these funds are in Southern Europe, and because multi-country funds are relatively highly geared at 47.3% compared to 35.2% for the overall Index.

Against this backdrop, it is curious that multi-country funds raised the highest level of capital attracting 54% of equity, according to the INREV Capital Raising Survey.

Debt and equity
Data from the INREV Index suggests that gearing levels significantly affected fund performance. Funds with gearing in excess of 60% underperformed those with lower gearing of 40% or less - at -4.5% and 5%, respectively. Funds with gearing of between 40% and 60% showed returns of 2.4%.

For the first time, the INREV Capital Raising Survey looked at debt funding alongside capital. In total, fund managers secured €5.5 billion of new loans in 2011. Most of this funding came from banks, but insurance companies provided 2% of debt and fund managers indicated a willingness to seek more debt from insurance companies in the future. All fund managers ruled out specific debt funds as a source of loans.

"The industry is reacting to the impact of challenging economic conditions. In this context, it's entirely appropriate for investors to apply a very considered and forensic perspective to their non-listed real estate investment strategies. We are clearly operating in an atmosphere

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