Unlisted UK property funds drew £449m in net inflows in the third quarter of this year. The Association of Real Estate Funds (AREF) released the data in a quarterly report which examines trends in the UK pooled property funds industry based on the investment flows of 67 member funds domiciled in and outside the UK, representing £21.5bn in assets at the end of September. The data corroborate a number of the conclusions in a bfinance property poll which found the commercial property cycle has largely bottomed in ten countries.

Property funds in the AREF universe raised £704m in the most recent quarter compared to £302m raised in Q2, representing the highest level in two years. Redemptions for the same universe of funds were £255m, broadly the same as Q2 and the lowest since 2006. On a three month basis, the funds saw their first positive return (1.7%) on average in two years. An important driver behind the inflows has been the search for yield with an average 5% yield for the funds compared to 3.8% for the FTSE All Share Dividend Yield and 3.7% for long-term government bonds.

“The financial markets have switched from pricing in a great recession to a scenario consistent with a healthy recovery in the economy,” notes the report. “This improvement in sentiment is proving to be good news for pooled property funds.” The All pooled property fund index has returned to levels last seen in 2003. In the 10 years to September 2009, pooled property funds have delivered an annualised return of 4.1% versus a 2.5% annualised return from the broader equity market and a 3.3% return from real estate stocks, according to the report.

Guarded outlook

Property funds such as Schroders, Aviva Investors, Hermes and Threadneedle indicate strong demand for their funds, with the weak pound also helping to pull in institutional investors. The strong inflows prompted Threadneedle to stagger cash inflows to its flagship property unit trust. In another sign that the commercial property market is experiencing a revival of interest, British Land and Land Securities announced last week an increase in their Net Asset Value (NAV) for the six months ending September 30.

“The timing of the turning point was slightly earlier than generally expected in July 2009 and by the end of our half year we had seen the first signs of recovery,” notes Land Securities in its half yearly report released November 18. “Looking ahead, we are confident that, from the low point in July 2009, property values will rise over the next five years characterised by ripples rather than pure straight-line growth, as residual risks and imbalances in the financial markets play out.”

In its half-year report, British Land offers a more guarded outlook: “Despite a rapid and positive shift in investor appetite for commercial property in recent weeks, the outlook for the commercial property market as a whole remains hard to predict. The refinancing overhang and the balance sheet exposure of the banks remain structural issues which will weigh on values over the medium term. Retailers remain exposed to the challenges faced by the consumer from growing unemployment and the economy as a whole.”

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