The unlisted UK property sector delivered a total return of 0.7% for the first quarter of 2012, remaining in positive territory but nevertheless trending down and recording its lowest return since the market entered the recovery phase in Q3 2009, according to the AREF/IPD UK Property Fund Index.
A stable income return of 80 bps more than offset what was a modest, 10 bps, reduction in Net Asset Values over the last quarter. Within this, balanced funds benefited from a 13 bps improvement in NAVs. Specialist funds, some of which are exposed to more challenged parts of the market, saw a -0.5% reduction in capital over the three months.
"At an individual fund level, all but four of the 27 balanced funds continued to deliver positive total returns this quarter, as did two thirds of all specialist funds," explained Malcolm Hunt, IPD Director of Client Services.
The gap between the unlisted returns and the underlying direct property market returns remains narrow, at -20 bps. The UK Monthly Index (which excludes the impacts of transaction, developments, fees, cash and gearing) recorded a 0.9% return for the quarter.
Hunt continued "The 0.7% return of unlisted property funds for the first quarter was over-shadowed by a revival in the listed property sector, producing 11.0%, which was partially supported by the strong performance of the broader equity market at 6.1%. Unlisted property funds remained ahead of the bond market, which returned -0.3%.
"Over a 12-month period those performance rankings are neatly reversed, with bonds generating a staggering 16.1%, unlisted property a healthy 5.4%, equities 1.4% and property equities -4.4%."
John Cartwright at AREF stated "A fall in values has meant gearing for specialist funds has increased for the first time in three years (as a % of GAV). Gearing levels overall for specialist funds had previously dropped from 47% to 32%, off the back of the market recovery and managers actively reducing their debt level exposures.
"Across the balanced funds gearing remains at an all-time low, just 2.6% of GAV, having a negligible impact on overall performance levels. On the flip-side, over-all cash holdings continued to have dampening effect on fund performance numbers in the current low interest rate environment."
The AREF/IPD UK PFI sponsored by the Association of Real Estate Funds (AREF), Linklaters and PropertyMatch comprises 27 balanced and 29 specialist quarterly-valued funds, with a combined net asset value of £28.8 billion at the end of Q1 2012.