IPD: UK property performance was driven by portfolio structure in 2010 (UK)

The 16.4 percentage point spread of returns across best and worst performing investors in UK commercial property in 2010 was driven by huge variations in portfolio structure, delegates at the IPD UK Annual Benchmark Launch were told.

While the range in portfolio performance narrowed last year back to long-term averages, returns varied from 5.4% to 21.7%, across the fifth to the 95th percentiles, set against the IPD UK Benchmark total return of 15.2%.

The IPD UK Annual Benchmark Launch published the performance winners and losers relative to the IPD UK Benchmark total return for 2010. Last year, the best and worst performing fund types were separated by a return spread of 7.5 percentage points, with the winner, for the sixth consecutive year, Traditional Estates & Charities, delivering a total return of 20.1%, followed by REITs & Property Companies, at 18.0%.

Their performance outshone the remaining eight fund types, as categorized by IPD, owing to greater investment in the outperforming parts of the market - central London Offices and Shopping Centers - which benefited most from yield compression and robust rental performance.

Speaking at the launch held at One Moorgate Place in central London on March 7, 2011, Phil Tily, UK & Ireland Managing Director at IPD told delegates: "Such was the huge variation in returns last year that property 'structure' was of key importance to portfolio performance."

Structure score refers to the component of attribution analysis which identifies performance derived from investment in market segments, as opposed to individual asset performance.

Looking at the performance by IPD's 10 standard segment benchmarks, performance across the market as a whole varied widely - by 15.4 percentage points; with West End offices winning the battle among central London offices by just 10 basis points, at 22.7%, while provincial offices were the weakest-performing segment, at 7.3%. Shopping Centers notably improved on 2009's severe underperformance, to deliver 17.2%, 10 basis points below Standard Retails in the South East. Also, notably, the gap between South East and provincial shops is the largest for nearly 20 years.

Tily explained: "Breaking down the results across different parts of the market, you can see just how varied rates of return were last year, central to which was the much-talked about polarisation between the South East and the rest of the country. London is a market in itself - very much the powerhouse of the property scene. There was not much to between West End and City offices, which incidentally were the only two segments of the market, where there was any noticeable rental growth last year."

Malcolm Hunt, Head of UK & Ireland Client Services at IPD, gave an account of the average capital employed throughout 2010, subdivided by activity. The breakdown reveals a surprisingly equal £3 billion worth of disposals, part transaction and developments whilst there were £6 billion of purchases. The total return derived from buying and selling strategies contrasted sharply, with sales delivering a 32.9% return (compounded monthly) and developments 20.1%, while purchases acted as a performance drag, at -1.1% over 2010.

The analysis based on IPD's Annual Databank, comprised of 284 investment funds capturing 12,253 assets worth £135 billion, reflecting around 60% of the entire professionally-managed UK commercial property market. Hunt told delegates that the drivers of portfolio performance in 2010 were clearly demonstrated by the quartile groups of performance. Top quartile funds returned 19.8% last year; followed by the 14.8% delivered by upper quartile funds; while lower and bottom quartile funds returned 12.5% and 8.6%, respectively.

He explained: "The outperforming parts of the market in 2010 - Shopping Centers and central London Office - were held in high proportion by the stellar outperformers in 2010; the top quartile funds had almost half their money in those big lot areas of the market, which led to strong portfolio structure scores.

"The top qu

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