There's more to direct property funds' poor performance than falling asset values, according to S&P.
The market downturn and credit drought were not the only factors behind the performance of direct property funds, according to Standard & Poor's.
Sharp declines in returns from unlisted direct property and diversified property funds were blamed mainly on the global financial crisis and the accompanying nosedive in confidence it brought with it.
However, S&P fund analyst Kelly Napier said while investors witnessed a stunning reversal of multi-digit returns, exploring the reasons for the poor performance needed to go well beyond the market downturn and credit drought.
"The practice of gearing up against increasing asset values and making distributions of unrealised capital, often debt funded, particularly influenced performance," Napier said.
"Investors should remain focused on these management practices as they are likely to continue to affect how these funds perform in future."
Most, if not all, property funds performed poorly in an absolute sense over the past two years, Napier said.
"Property markets do move in cycles and the fall in property values, which occurred as capitalisation rates expanded, was the main contributor," she said.
"But in our view, there are other factors that amplify negative returns and result in differences in performance between funds."
Direct and diversified property funds differ based on their investment mandates, strategies, management teams, investment assets, fund structures and their risk management policies. While all of these factors can influence performance, Napier said investors may not have considered these important.
"By taking those differences into account and adding deteriorating economic conditions, debt market problems, high gearing, falling asset values, market uncertainty, negative investor sentiment, and an illiquid asset class, there are many contributors to performance," she said.
The two non-consecutive alphabetic letters encountered most often last week caused more controversy than the underlying policy they represented, Wouter Klijn writes.... read more »
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