Returns in the unlisted sector rose to 0.4% in the third quarter of 2012, as underlying falls in valuation in the direct property market eased slightly, according to the AREF/IPD UK Pooled Property Fund Index.
Balanced funds continued to outperform their specialist counterparts, but the gap in performance narrowed to just 10 basis points, 0.4 to 0.3%.
Over the last 12 months the unlisted sector has returned 2.5%, against the 3.5% delivered by the direct commercial property market. Equities and REITs have had a volatile but strong twelve months, and the effects of last summer's crisis of confidence have now dropped out of their twelve month returns. As a result, Property REITs, as measured by the FTSE All-Share REITs Index, returned 19.5%, while equities and Gilts 17.2% and 8.8% respectively (FTSE All-Share Index/FTSE 5-15 yr Gilt Index).
Balanced funds have delivered 2.8% over the last year, outperforming specialist funds, which delivered 2.0%. Though more highly leveraged, the effects of gearing on specialist funds were muted, and the underperformance has been due to higher allocations to some of the more challenged parts of the market.
Nine of the top ten best performing funds this quarter were strategically focused on alternative property sectors, central London or long let income streams. Funds with a more balanced exposure to the retail, office and industrial markets saw relatively subdued returns.
There has been similar outperformance in the direct property market in the alternative asset sector, which remained relatively insulated from the slow down affecting the wider UK property market.
Though returns for the quarter have only improved by 20 basis points, out of the 53 funds measured, 64% delivered positive returns an improvement on last quarter, and a sign of slowing declines in the property market that began a year ago.
Unlike in the direct investment IPD UK Monthly Property Index, it should be noted that the UKPPFI also records the impacts of transactions, developments, fees, cash and gearing. Gearing levels crept down by 10 basis points overall, as funds continued their strategy of deleveraging.
John Cartwright, chief executive at AREF, said: "Funds that invested in alternative real estate assets have weathered the first nine months of 2012 surprisingly well, although there were some exceptions and in the last quarter this outperformance has continued.
"There are very specific factors that affect returns in these particular sectors for instance student funds are able to take advantage of overseas student demand, while leisure funds have access to long-leased tenants and although the returns are strong for the moment, there is a need for investors to understand the specific fundamentals driving the returns in each sector."
Phil Tily, IPD UK and Ireland managing director, said: "Overall conditions are improving in the unlisted sector, and although performance levels remain low, it's important to remember that returns have remained in positive territory at all points during the latest downturn in the market.
"Shopping centre funds overall have seen a marked improvement in returns in the last three months, after a difficult year, which should bring some cheer to the sector.
"Considering the wider economic uncertainty created by the euro and the stifling austerity cuts in the UK, the majority of UK funds are still delivering robust performance levels with positive rates of return with a handful even reaching double digits over the last 12 months."