EURO PROPERTY
been destroyed by the way in which the fund has been financed,” says one of the report’s authors, Andrew Baum, professor of land management at the Henley Business School and University of Reading and academic fellow of ULI Europe. Annual total returns of core funds with little or no gearing and invested in prime assets closely tracked the underlying IPD index until 2009. Since then they have underperformed, probably because of the impact of capital flows into and out of open-ended funds. Leverage hindered performance by 1.1% for every 10% of debt. Value-added funds, typically with 40% to 60% gearing, “significantly underperformed” the market between 2008 and 2011, having out- performed between 2001 and 2007. Every 10% of leverage within these funds reduced annual returns by 2% and leverage was the reason for all of the underperformance. But for vehicles with higher-risk profiles and gearing over 60%, gearing reduced returns by 2.2% per year for every 10% of debt, equivalent to 13.2% per annum for a 60% leveraged investment.
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+ Delegates at a recent seminar held by the
Europe is still looking at the largest debt gap of any global region
European Public Real Estate Association (EPRA) heard that the sector must continue to deleverage if it is to have any hope of increasing its share of public capital. Seminar panel chairman and Bank of America
Merrill Lynch analyst Bernd Stahli said that over the past few decades much of companies’ internal growth, with some exceptions, had been “negative,” and that commercial property had not even been a hedge against inflation. Panellist Robert Noel, managing director of
UK-based property firm Land Securities, said investors were put off real estate partly by its high debt levels, which have led to damaging volatility during recent boom-and-bust cycles. It all might seem obvious with the benefit of hindsight but, as Derwent London CEO John Burns said at the seminar: “Years ago, shareholders would have criticised you if you didn’t have 100% leverage.” So how is the process of shedding debt proceeding?
IN ASSOCIATION WITH
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