Intreal research: Article 8 funds earn positive returns earlier

Article 8 funds, which promote environmental or social characteristics under the EU’s Sustainable Finance Disclosure Regulation (SFDR), start earning positive returns earlier in the fund cycle than Article 6 funds, according to performance analysis conducted by Intreal Solutions and released yesterday.

The finding runs counter to common assumptions that Article 6 funds, which do not integrate any kind of sustainability concerns in the investment process, deliver a better performance.

“Prior to our examination, we assumed that Article 8 products would have a significantly longer negative yield performance than Article 6 products in the early phases of their life cycles,” said Annika Dylong, head of consulting and services, Intreal Solutions. “We can cautiously refute these assumptions, as our research findings show that the article 8 funds actually started earning positive returns before their Article 6 peers did.”

Intreal Solutions, an IT service provider and consultancy firm, collaborated with the International Real Estate Business School at the University of Regensburg to conduct a performance analysis of 26 Article 6 funds and 10 Article 8 funds.

The key finding is that Article 8 funds tend to reach their break-even point, meaning the time after which the fund starts generating positive returns based on the internal rate of return (IRR), around 1.7 months earlier than Article 6 funds do.

“Market players often share their concern with us that sustainability requirements will mean significantly higher costs and thus have an adverse impact on performance,” said Dylong. “We found no basis for this notion in our data. From an investor’s point of view, Article 8 funds do not show significantly inferior performance curves in their early life cycles than Article 6 funds.”

Documentation and reporting are usually more demanding and more costly for Article 8 or Article 9 funds and therefore the assumption was that the required time and effort would diminish the returns on the investment. However, the analysis shows that the yields of Article 8 funds are not diminished by higher upfront costs.

“In fact, these funds outperformed Article 6 funds during the early phase while the phase of negative returns extended over a shorter period of time,” said Dylong. “There are two reasons for this: first, it appears that the costs of the fund launch as well as the due diligence and acquisition processes of the properties do not depend on the type of the respective fund. And secondly, the higher initial costs amortise sooner once the cash flow has stabilised.”

The survey represents a first analysis of the behaviour of property fund returns under the new ESG regulatory regime at EU level. Further research on the long-term yield performance of fund vehicles under SFDR is required, Intreal said. As the regulatory framework is so recent, it is still too early to conduct long-term studies. A final assessment of the returns paid by a property fund is impossible until that fund has been wound up and all of its properties have been sold off.

“We are closely watching the developments related to the SFDR and their implications for real estate market players,” said Dylong. “To do justice to the intrinsic purpose of the EU regulation, it is crucial to conduct investigations that objectively examine the performance of investment products from the perspective of the financial sector. We seek to use clear-cut analyses to clarify the sometimes hazy meaning of the term ‘ESG’ within a finance context.”