INREV measures Covid’s impact on unlisted real estate

The Covid 19 pandemic is having a measurably negative effect on real estate returns and INREV’s Quarterly Asset Level Index indicates the worst performance since the index started in 2014.

The sector has dipped for the second consecutive quarter and the index of total returns has turned negative for the first time having fallen from 0.50% in Q1 to -0.33% in Q2. INREV, the European Association for Investors in Non-Listed Real Estate Vehicles, said this is attributable to “continuing downward pressure from the COVID-19 pandemic on the European non-listed real estate industry”.

Specifically, property’s weak performance was caused by negative capital growth.After the first quarter -0.45% decline, it fell -1.21% in Q2. Income return also slipped from 0.95% in Q1 to 0.89%, in Q2.

At the fund level performance was similar. The INREV Quarterly Fund Index indicated that total returns turned negative for the first time since Q4 2012, sliding from 0.05% in Q1 2020 to -0.60% in Q2 2020.

Residential property performed best, despite a drop in fund returns from 2.79% in Q1 to 1.19% in Q2. According to the INREV Quarterly Fund Index, retail continued to slide with a fifth consecutive quarter of negative performance, taking it to its deepest trough since Q2 2009, with returns of -3.99% in the last quarter.

While the office sector moderated at 0.38% even industrial/logistics slowed, to 0.62%.

INREV said rent collection remained a challenge for both open and closed end funds during the second quarter with 21.5% of survey respondents indicating that they had received less than half of their rent on time. This figure was up from 14.1% in Q1 2020.

Only 66.0% of respondents in Q2 (78.1% in Q1) said that they had received between 75% and 100% of rent due for the period.

More respondents expect an impact on net operating income in the future – 78.1% in Q2 2020 compared with 66.7% the previous quarter – be it an increase in rent frees, rent reduction, rent deferrals, or ‘other’.

Open end fund liquidity affected

The Covid 19 crisis has also affected liquidity of open end funds, and 24% of survey respondents indicated that their fund had suspended unit subscriptions, redemptions or the issuance of a dealing NAV. This had increased from 8.5% of respondents in June 2020.

INREV’s second COVID-19 Sentiment Survey revealed how investors and managers are adjusting to the new reality, with 75% of respondents indicating a willingness to provide a degree of rent relief or abatement to their tenants. Similarly, only 33% said they were planning to revise their investment plans in light of the pandemic, as opposed to 55% when the first survey was conducted in May.

“The effect on returns and other aspects of performance were broadly anticipated, however between January and August 2020 the volume of deals in excess of €250 million rose year-on-year,” said INREV’s CEO Lonneke Löwik.