Mixed messages from Europe property funds in 2012 -IPD
Uncertainty in the eurozone has continued to plague real estate funds in 2012, with weak performance continuing in most European markets, according to latest analysis from IPD property fund indexes
It update found that the direction of real estate markets, and whether or not returns have now hit the bottom – still looks “very unclear”.
Property fund markets are reflecting the fragile state of economic fundamentals in most countries, with inevitable uncertainty amongst property occupiers feeding through into the market rental levels upon which fund valuations and returns are based, the group’s report said. These valuation effects are being compounded by the lack of transactions activity in direct real estate markets, particularly outside core property sectors and locations.
IPD real estate fund indices for Europe are starting to show a pronounced north-south divide, with vehicles investing in the Nordic region strongest through the last four six-month periods, and those focused on Italy the weakest, their underlying values falling significantly during the last year.
German fund returns – as generated by open-ended vehicles – have meanwhile remained a beacon of stability – contrasting significantly with the more volatile returns generated by German open-ended funds investing outside Germany, many of which are now closed for redemptions.
France and the UK meanwhile appear to be diverging, with French funds having staged something of a recovery in the first half of 2012, while British vehicles show no signs of ending the downward trend in performance which began in the latter part of 2010.
A similar trend – though at a lower level – is seen for pan-European vehicles, which have a significant UK component and which are valued in line with UK Royal Institution of Chartered Surveyors guidelines.
Portuguese funds, whose returns can only to be shown annually due to reporting regulations, emerge with a similarly stable performance to Germany, though with a significant decline over the last year. This similarity says more about fund structures in operation than the economic fundamentals underpinning the property markets of these two countries, the report said.
IPD fund indices do not only reflect the underlying performance of the properties held in these vehicles, but also the effects of leverage, cash holdings and fees, on the returns received by the investor.
Amongst the indices covered, leverage is highest for the funds in the Nordic index at just over 50% of gross asset value. Other things being equal, this will have had the effect of enhancing the positive return produced by these funds in recent months, the report noted.
Pan-European funds are also quite highly-geared, increasing their return volatility on both the upside and downside of the market. The German, Portuguese and UK funds conversely have a low level of leverage.
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