UK pooled property funds delivered 2.2% returns for Q1 2011, according to the AREF/IPD UK Pooled Property Funds Indices (PPFI). This was 50 basis points lower than the Q4 2010 return, but similar to the 2.3% delivered by the direct market.
The slowing performance can be traced to the falling returns within specialist funds, which came down by 130 basis points over Q1, to 2.7%. Balanced fund returns, by comparison, remained unchanged, at 1.9%. Specialist funds have now outperformed balanced funds for the six consecutive quarters of the recovery period, dating back to December 2009.
Declining returns among the shopping center funds, which account for 25.4% of the specialist portfolios, have been the key drag on the performance in this category. Five out of six of these funds have seen falls in returns of over 200 basis points.
Balanced funds over the last 18 months have tended to underperform specialist portfolios, reflecting lower levels of leverage and higher cash holdings, both of which, in a rising market, will have had an adverse impact on their relative performance levels.
Overall, the average gross loan-to-value ratio declined slightly in the first quarter, to 18.1%, down from 18.6% in Q4 2010. Average cash holdings remain largely unchanged, at 5.6%.
Phil Tily, UK and Ireland Managing Director at IPD said: "Debt is having less of an impact on the overall performance numbers, and returns in the market have begun to stabilize, having edged down during the last three months."
Tily added: "On a rolling annual basis to the end of March 2011, fund performance remains strong, with a 10.8% return, which is marginally ahead of the direct market. These results compare favorably with the equity and fixed income markets, returning 8.7% and 6.1% respectively." (FTSE All Share Index and FT Gilts 5 - 15 Years Index).
The AREF/IPD UK PPFI - sponsored by the Association of Real Estate Funds (AREF) and Linklaters - is comprised of 26 balanced and 32 specialist quarterly-valued funds, with a combined net asset value of £28.1 billion at the end of Q1 2011.