Quarterly pooled property fund return falls decelerate, says IPD

The performance of quarterly valued unlisted UK pooled funds has decelerated to the shallowest negative returns for 18 months, at -5.2%, according to the IPD UK Pooled Property Fund Indices published.

A combination of a deceleration in capital value falls at the direct property market level, an easing in redemption pressures on funds’ net asset values (NAVs) as well as the alternating impacts of gearing across the mixture of fund sub-groups explains the modest 5.6 percentage point spread of returns.

Total returns for all pooled funds in the IPD UK PPFI – sponsored by The Association of Real Estate Funds (AREF) and Linklaters – now stand at -15.7% for the year-to-date. While this compares unfavourably to the same six-month period last year, which returned -10.3%, it is a significant improvement on the second half of 2008, during which -24.2% was returned.

The latest quarterly results coincide with the anniversary of the two-year decline in the UK direct property market. The twin pressures of redemptions which have required funds to often sell at discounted prices, which further reduced funds’ NAV, and the influence of gearing account for the 25.8 percentage point spread of returns among the fund sub-groups.

Two-year fund level performance bears out this analysis. Managed funds, predominantly pension funds that re-invest income and held a net 13.7% cash position at the end of Q2 2009, returned -33%, while specialist funds – applying an average of 79.8% leverage – delivered -58.8% over the two-year period.

Completing the sub-groups, balanced PUTs, low geared balanced and all balanced funds delivered -41.6%, -38.6% and -38.1%, respectively.

The performance spread of all pooled fund returns, according to the IPD UK PPFI, was 47pp over the three months to end of June; 71.9pp over the year to date and; 87.7pp over the 12 months to the end of June 2009.

Within the 62-strong fund universe – which has an aggregated net asset value of £19.4bn – the 27 balanced funds delivered a total return of -3.3% over the second quarter. This return was matched by the low geared balanced funds while the 35 more heavily-geared specialist funds, by comparison, delivered -7.8%.

Annualised total returns for all pooled funds over three, five and 10 years now stand at -16.5%, -2.9% and 4.3% respectively. Over 10 years, pooled property funds have now fallen behind the performance of bonds, at 6.0%, but continue to outperform both property equities and the wider equities market.

Cameron McVean, Head of Fund Services at IPD, said: “The unlisted fund sector has seen significant changes over the last two years – falling capital values in the direct market coupled with, in some cases, significant redemption requests have led to much reduced fund sizes.”

“In challenging times investors require greater transparency to make informed strategic judgments on their investments. To that end, the Index Consultative Group has decided to include a Specialist Property Fund Index with a time series dating back to December 2001, to enable those investors to more fully measure their fund performance against a wider benchmark.”

source : IPD