After five consecutive quarters of growth cross border European property funds saw returns fall to -0.2% in Q3 2011, according to the IPD Pan European Property Funds Index.
"The ongoing euro zone contagion fears have led to some writing down of the value of some assets," said Doug Rowlands, Associate Director at IPD.
"Although this is the first negative return since early 2010, it is far milder than the -17% return for the European listed real estate market. Despite this marginal decline, the distribution yield remains high, at close to 5%, and leverage across all the funds remains below 40%."
Cameron McVean, Head of Fund Services at IPD, explained, "UK pooled property still returned 1.5% in Q3 2011, while the IPD German Open Ended Funds Index, OFIX, recorded 0.4%. The majority of funds in the Pan European index still recorded positive, albeit moderate, returns, but certain exposures to Southern Europe dragged the index into negative territory."
Dr Nassos Manginas, Director of Global Client Services at IPD said: "Balanced funds outperformed specialist for the first time since December, recording returns of 0.4%, as opposed to -0.5%. Specialist funds, with their higher exposure to riskier areas of the market, suffered, while balanced portfolios benefitted from the stability still found in Northern Europe. Income return, 1.2% at the all funds level, remained stable.
"Gearing and cash levels remained relatively steady throughout the quarter. ECB interest rates remained at 1.5%, which would have been beneficial to the more highly geared specialist funds, which have an average gearing to GAV of 42.8%, as opposed to 30.1% in the balanced portfolios. This, however, was not enough to offset the influence of portfolio write-downs."
The index posted returns of 5.1% over the past year. Although this quarter's performance is weaker than other comparable indices, including the US NCREIF ODCE and the UK PPFI, this is still in part due to the greater long-term stability of the Pan European Property Funds Index. Driven by geographic diversification and low exposure to volatile markets such as the UK has meant the index experienced a relatively mild cycle during the recent downturn.