IPD: US real estate emerges from two and a half year slump (US)

The range of returns to investors in US core open-ended funds remain above long-term norms, despite the recovery in market values over the second quarter, IPD research has shown.

Headline indicators

Source: IPD US Quarterly Property Index

Underlying US commercial real estate markets have emerged from two and a half years of write-downs with a quarterly positive capital return of 2.2% - contributing to a 4.0% total return, as measured by the IPD US Quarterly Property Index.

However, coming out of the real estate recession there have been a number of mixed signals. "Some funds are experiencing substantial inflows of new money while the aggregate position points to overall redemptions," explains Simon Fairchild, Managing Director at IPD North America.

"At this stage in the cycle we would expect to see investors coming back in to buy assets at the re-priced levels, which have now fallen by more than a third, but the overall net disinvestment reveals an inconsistent pattern of fund activity.

"This seems to be because the capital flowing back into US real estate is risk-averse and chasing prime stock that owners do not want to sell. Perversely, at the prime end, the environment is operating as a sellers' market with prime stock-owners demanding premiums to consider transactions. All of this confirms that the pick up in the market is far from uniform."

Fairchild added: "While there has been a narrowing in the range of returns posted by the core funds, the spread remains historically high, in part due to varying degrees of leverage, but also the legacy of write downs in value during the downturn."

The second quarter
Income returns, which helped deliver the first quarterly positive total return in two years last quarter, nudged upwards by 10 basis points over three months to June. The two components of performance combined to deliver a quarterly total of 4.0%. The annual capital growth rate is now -6.7% but a strong income return (7.1%) has pulled the return for the 12 months to June to -0.1%.

At the gross fund return level (taking into account other assets, cash and liabilities) funds are returning to positive territory with the exception of those with high leveraged positions.

The return to capital growth among US core open-ended real estate funds over the second quarter masks a divergence in fund returns driven by leverage, according to IPD.

There was a 2.2% spread in quarterly, unleveraged performance from best to worst, counting from 5th to 95th fund percentile to strip-out performance outliers, over the three months to June 2010.

But an analysis of the headline figure reveals the spread of fund returns when including all assets and debt – which among the open-ended funds in the IPD US Databank was an average of 30.7% – jumps to 3.8% between the top 5% and bottom 5%.

Overall, although there is an uptick in transaction activity, net investment is still negative. And the pace of disinvestment among the funds has decreased by more than a third quarter-on-quarter (37.5%) to - US $347 mln. over the second quarter, an improvement on the - US $612 mln. in the first quarter.

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