AREF says slowing capital growth will make income the key factor for funds

Income formed more than a third of total pooled property fund returns in Q1 2011, AREF reports

Income returns will be “a key differentiator” among property funds in future, according to the Association of Real Estate Funds. The latest AREF/IPD UK All Pooled Property Fund Indices shows the effect of slowing capital growth, with the Q2 2011 total return at 1.9%, down from 2.2% for Q1 and 2.7% in Q4 2010.

“With property funds experiencing a moderation of performance, income returns are gaining significance and are likely to be a key differentiator in the property sector,” said AREF chief executive John Cartwright. AREF has yet to produce its own Investment Quarterly analysis of the Q2 2011 figures, but Cartwright said Q1 2011 income returns formed over a third of the total return, up from only a 10th in Q1 2010.

Malcolm Hunt, IPD director of UK and Ireland client services, said specialist funds fell 0.7% quarter on quarter to 2% in Q2. He added: “In the upswing, specialist funds’ higher gearing and lower cash holdings were an advantage, but as the market has levelled out, their outper-formance has been eroded.”

Cartwright said he believed that income accounts for “two- thirds to three-quarters of total, long-run return for an ungeared fund in a stable market”. He pointed out that in the UK PPFI Index, the specialist, rather than balanced, fund sample has heavier weightings in retail warehouses, shopping centres and specialist sectors.

The latter two provide above average income returns compared to the IPD UK Quarterly All-Property Index. AREF’s Q1 2011 Investment Quarterly shows that capital flows into existing funds continued to slow down, from £687m to £413m, but the lowest redemptions since 2006, at £225m, meant inflows just remained net positive, at £188m. Cartwright said that despite a flattening of capital returns, the attraction of income meant that the “wall of hot money” that hit funds in the second half of 2009 had stayed in.