Investment returns from European non-listed real estate funds fell sharply in 2007 as the credit crunch began to bite into fund performance, the INREV Institutional Vehicles Index showed.
When measured in euros, the INREV Institutional Index produced a -3.9% total return in 2007, compared with 21% in 2006. This dramatic fall can be explained by the euro increasing in strength against the dollar and sterling as well as a poor performance from the UK market for non-listed real estate funds.
"What these results mask is the fact that Continental Europe still turned in a strong performance at 12.5% in 2007 as shown in our new Europe Ex-UK sub index. This is still down on the 16.1% from 2006 but demonstrates that the impact of the credit crunch is varying greatly across the European markets with the UK taking the greatest hit so far," said INREV Chief Executive Lisette van Doorn.
"The majority of Continental European funds have performed far better than vehicles in the UK, as shown by the overall 2007 index figures. There was, nevertheless, an increase in yields, but the underlying market was not as affected by the credit crunch as the UK. With the return of risk considerations into pricing, there could be further rises in yields to come on the Continent this year," Michael Morgenroth, member of the board of Germany's Gothaer Asset Management said.
"I think the important thing to focus on is the vintage of the funds, There was a wide spread in the performance of those vehicles that were winding down in 2007, so capturing most of the yield compression and those that started up in 2006 and were only able to benefit for a limited period from the boom in the market. This year I believe value added funds will be the best performing investment style, as they're not as highly leveraged as opportunistic funds, so shouldn't be so affected by credit constraints and they're also not as dependent on yield compression as core vehicles for their performance," Morgenroth added. "However, within the value added style, outperformance will really depend on the manager able to add value to the properties, so the difference between winners and losers will definitely start to show."
The strong influence of currency factors in the performance of the INREV Index in 2007 can be seen when the results were expressed in sterling producing a return of 4.8%, or in dollars at 6.6%, but the heavy weighting of UK market in the overall index was also a major contributory factor in the low European total return. In sterling the UK market returned -5.9% compared with -13.8% in euros. "The closing months of 2007 saw the fastest ever re-pricing of the UK property market after four successive years when UK funds outperformed those in Continental Europe. Leveraged vehicles suffered disproportionately as capital returns turned negative, and the effects of tighter credit markets began to make an impact," commented Andrew Smith of Goodman Property Investors, who chairs INREV's Benchmarking Committee.
"The extent of the re-pricing means that the UK is now coming back onto many international investors' radar screens, with underlying yields looking more competitive than they have for three years," he said. The INREV Index measures annual net asset value-based performance for non-listed real estate funds investing more than 90% of its allocation in Europe. The 2007 release of the Index covers 257 vehicles (including retail vehicles) with a total net asset value of
