IPD: European cross-border property funds underperform US

Pan-European pooled property delivered a total return of 2.2% in the first quarter of 2011, according to the IPD Pan-European property funds index.

The index, now in its second quarter of consultative release, is one of the few indicators for comparable cross-border performance in Europe. Consisting of 18 open-ended funds, worth €11 billion, of which €7.8 billion are specialist and €3.2 billion balanced portfolios, the index's performance is in line with the UK's for open ended vehicles, which recorded 1.9% in Q1 2011.

Cross-border European returns, which did not return to positive territory until mid-2010, almost a year after the UK pooled funds market, have not seen the same spike in returns in their recovery, partly due to the inherent stability of some of the markets covered, and because other national markets have yet to see recovery. While European returns have caught up with the UK's, they still lag behind those of the US market (measured by the US NCREIF ODCE Index), which is in an earlier stage of the recovery cycle.

Capital inflows into pan-European funds have remained strong throughout the downturn, with €1.3 billion invested in 2010, and a further €86 million invested in the first quarter of 2011, indicating the increasing demand for investment in European cross border vehicles and their ability to harness the risk and cross border performance of the various European markets.

Dr. Nassos Manginas, International Client Director at IPD, commenting on the latest release, said, "With the increase in investment in European open-ended funds the importance of the IPD Pan-European Property fund index is twofold, not just as a benchmarking tool for investors, but as a comparable index that reveals European wide performance, including the effects of NAV and management fees.

"Utilizing a bottom-up approach based on the analysis of individual assets, coupled with the attribution of their performance to a selected group of factors, we have provided the analytical basis for dissecting and explaining the determinants of returns at both fund and asset level. It is the link between the direct asset's performance and the fund-level return which we are currently exploring, analyzing and further developing".

Allocation amongst the funds favored France (24%) and Southern Europe (20%), for investment, compared to direct property weightings, taken from the IPD Pan-European direct index, which saw France and Southern Europe making up only 15% and 10% respectively.

Doug Rowlands, Associate Director at IPD said "The increased allocation came at the expense of the UK and Nordic countries, which comprise about 19% and 12% respectively of the direct market, but made up only 12% and 2% of the Pan-European property funds index. Investors traditionally favor the slightly less volatile markets in Europe that still deliver strong returns. This is also largely due to currency associated risks, and though the growth in cross European funds has been strong, exposure to currency risks remains a primary concern and constrains geographic allocations."

The average gross loan to value declined slightly in the first quarter, down to 39.3%, while average cash holdings increased.

Further work is currently underway at IPD to provide a benchmarking service and subsequent attribution analysis for the direct property held by cross-border pan-European investors and fund managers. The new benchmarking and performance analysis service will result in the formation of a quarterly pan-European direct property benchmark equivalent to the IPD Pan-European Property Fund Indices.

Manginas, added "In working directly with and for real estate fund managers, we are confident that many interesting aspects of analytics and customized benchmarking at the fund level will be highlighted, giving us a greater understanding of the contribution of all components to fund performance. By incorporating both direct and indirect performance into the analysis we will be able to create a comprehensive real estate portfolio performance figure for Eu

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