Total returns at the NAV level for pan European funds slowed to just 0.1% in the first quarter of 2012, resulting in a 12 month return to March of 2.1%, their lowest in nearly two years.
Although the underlying direct real estate returns were stronger, at 0.9% for the quarter and 5.9% for the last 12 months, they also represented a deterioration on previous quarters. This weakening of performance could have been expected given the Eurozone debt crisis and the slowing of economic growth, and is in sharp contrast to the stronger performance in the US and Australia.
The weakest performance was experienced in Spain and Italy where values fell by 3.2% and 1.7% respectively during the quarter. Despite these declines, the pan-European funds have positioned themselves to have a relatively low exposure to Southern Europe at 6% compared with 9% for the market as a whole.
"As such," stated Douglas Rowlands, Head of Multinational Services at IPD, "the turmoil and weakness in Southern Europe had a relatively minor direct impact on overall performance. Instead it's the broader implications of the sovereign debt crisis on the European economy that are proving more significant, with declining values in nine of the 10 markets that these European funds cover."
Negative growth in France and Germany, which account for almost 50% of the fund's allocations were the main drag on returns. In France, values on the direct property underlying assets fell by -1.0%, in Germany by 0.3%. Although these economies are more robust than those of southern Europe, their real estate markets have started to soften, and the large exposure to these markets is acting as a drag on the index.
In contrast, the funds have a relatively low exposure to Sweden, the strongest performing market, where values rose 1.5%, generating a total return of over 3% for the quarter.
Despite this softening, the index continues to deliver a positive return, driven by the relatively high distribution yield of 4.7%. As always, there are significant variations across the 16 funds that comprise the index, with distribution yields ranging from 0% for the bottom percentile of funds to 6.5% for the 95th percentile. It is the insights into these variations that are proving to be so useful to the managers of the funds and to their investors.
As stated by Peter Hobbs, Senior Director, at IPD, "Perhaps the greatest value of the pEPFI is its scope to provide benchmarks that help individual portfolio managers and CIO's to understand reasons for their relative position, to help them take actions to improve performance, and to deepen their communications within investors."