Residential investment property delivers solid six month returns, according to report

Written by Ray Clancy

Monday, 13 September 2010 10:16

Investment grade market let residential property delivered a solid 4.7% six month total return to June, according to the inaugural IPD UK Biannual Residential Investment Indicator.

Assuming the same return over the second half of this year, this would deliver an annualized rate of return for 2010 of 9.6%. Over the two previous years, during which the worst of the property recession and recovery manifested, the annualized return was -3.3%, based on the IPD UK Annual Residential Index.

This is the first ever bi-annual Residential Indicator published by IPD, reflecting the need for greater transparency for residential property investors as this sector of the market continues to grow in popularity among institutional investors. The Index captures 4,713 properties, worth just under £1 billion.

The solid return demonstrates the pedigree of the residential sector in delivering robust returns in a rising market, in addition to insulated depreciation during falling markets. The six month total return combines a 2.5% capital growth with 2.2% income return.

‘While the six month returns underperform the broader commercial property market by almost five percentage points, the broader market fell much more substantially during the cycle and therefore benefited more from the subsequent rebound,’ said Mark Weedon, head of UK Residential Services at IPD.

‘Residential performance during the first six months of 2010 continues to reflect the solid returns and lack of volatility which investors have come to enjoy and expect,’ he added.

Meanwhile another report shows that non listed real estate investment weathered the recent financial crisis no worse than the other real estate investments.

What has changed is that many larger investors are now increasingly using their financial firepower to influence the shape of the fund management industry to better meet their more demanding requirements and longer term outlook, says the report from INREV.

‘Our research demonstrates that on a like-for-like, ungeared basis non listed real estate has performed on par with other real estate investments, accepting the overall weak performance of the sector,’ said Lonneke Löwik, director of research and market information.

‘Many of the reasons that make non listed an attractive investment have endured, but the industry has changed with investors demanding deeper due diligence and a more binding relationship with fund managers than before the crisis. We consider this a natural evolution, not revolution,’ he explained.

‘Analysis indicated that excessive gearing used by a minority of funds, brought down returns and industry into disrepute, but it is unfair to stigmatize the wider industry that behaved more rationally,’ he added.

The report finds that there has been a break down in trust not only between fund managers and investors, but to some extent across the entire investment fund universe. This is principally due to the false impression of liquidity which drew in shorter horizon investors whose objectives differed significantly from long term investors during the crisis.

It has led to closer alignment of interest between fund managers and investors, manifested in changes to management and performance fee structures with more insistence on continuity of personnel and co-investment, and a much greater emphasis on rewarding value realized over the longer term, rather than notional value in the short term. However, many are seeking more homogenous investor pools, the report points out.

‘Large institutional investors will increasingly seek to partner fund managers in creating new products as a means of underwriting strategy and ensuring alignment of interest. As investors seek greater control and more accountability, fund managers are paying the price for the failure of a few who did not exercise their fiduciary duty during the crisis. While the strong reasons to invest in non listed real estate proved extremely durable over the crisis, the report shows that investors are much more engaged and demanding fundamental changes in the investment model,’ said chief executive officer Matthias Thomas.