The unprecedented 100 percentage point spread of performance within the European unlisted real estate property fund market in 2008 reflected the geography of investment returns, the impacts of leverage, and a further penalty for some investors of adverse currency movements, research based on the new IPD European fund indices reveals.
According to the inaugural bi-annual IPD European Pooled Property Fund Indices 2008 (e-PPFI) reporting the NAV based total return performance of 203 predominantly core and value-added funds representing a total NAV of 121 billion euros European unlisted pooled funds delivered a local currency time-weighted total return of -7.4%, which translated to a -14.8% return to Euro denominated investors, each of whom suffered the added pain of a major fall in the sterling-euro cross rates. Both of these figures, however, mask a much more complex set of competing influences. Across the database, performance varied dramatically from -80% to +25%, in local currencies.
Overlaid upon this market geography, the impact of a strong euro against a falling pound through 2008 further diluted the overall performance of the UK fund contingent. To exemplify this, the all pooled fund index total return for UK pooled funds in 2008 in sterling was -32.0%, but when taken in euros that figure fell to -41.9%. There was also a significant difference in the vehicle level performance of funds when compared with that at the level of direct property assets. To examine this, IPD analyzed the 103 funds within the overall data sample which are independently measured individually at the property level. The performance of the direct property held by this sample was -19.9%, but the fully diluted NAV performance of the same group was -24.6%.
The vast majority of individual funds in both geographic groupings echoed this aggregated pattern, with returns higher at the direct property level than at the vehicle level, reflecting the combined impacts of both fees and debt. To the extent to which there were exceptions these can be explained by high cash holdings and isolated profits realized from capital activity.
The most significant cause of the overall disparity between direct property and vehicle level performance was gearing. The 103 fund sample used for the analysis had an average gearing level (net debt / NAV) of 17.5%. It is clear from fund-by-fund comparisons that the higher the level of debt, the greater the negative difference between fund performance and underlying direct property performance. The European PPFI, with historical performance reported back to the start of the decade, broadly reflects the wider European unlisted property fund market in terms of size, geography and fund type. The average fund size within the database, for example, is 570m, while the ratio of balanced to specialist funds is 45:55. By geography, the database's main market constituents are (by value): UK, 37%; pan- European, 27%; Italian, 14%; Germany, 7% and; France, 6%; while the balance of the database includes funds from Netherlands, Portugal, Finland, Sweden and Denmark. This is a broadly similar profile to that of the composition of the direct property market.
The reported six-monthly Indices numbers are constructed on the same basis as for all other fund indices published by IPD, and demonstrate the imbalance between the two halves of 2008 with most of the decline experienced in the second half year. By comparison with other investments, European pooled funds outperformed European equities and property equities which both delivered deeply negative returns at -38.5% and -48.6% respectively, according to the MSCI Europe and the FTSE EPRA/ NAREIT indices. However, unlisted European property funds underperformed European bonds, which returned 7.7% over 2008.
The full picture of direct property performance at a European scale will be released on May 11th 2009 in the IPD Pan-European property index.