EUROPE - Unlisted European real estate funds saw a negative return on their investments of -3.9% in 2007, driven by the very poor performance of the UK property market as well as currency conversion pressures attached to the dollar and euro.

Figures released today by INREV, the European association for investors in non-listed real estate funds, under its new INREV Institutional Vehicles index revealed while the European funds, excluding the UK sub-index, generated a return of 12.5% last year, albeit this is lower than the 16% seen in 2006.

That said, the serious downturn in the UK market was particularly noticeable as 71 of the 257 funds - with net assets of €162bn - which contribute data are UK-centric.

Moreover, the strength of the euro against both the dollar and sterling seriously damaged property returns as those negative returns on UK property could be read as -5.9% in sterling but drops even further to -13.8% when data is listed in euros, an issue Andrea Carpenter, director of research and market information at INREV, was especially keen to highlight at the INREV conference in Istanbul, Turkey.

The Institutional index is reported in euros, so we are seeing a huge difference [in performance], particularly as the UK is a large component," said Carpenter.

"Finland, France and the Netherlands were the better performing countries, although this is also to do with varying data samples. Residential and office outperformed which is quite surprising because the high income returns on logistics usually help that sector, and this time it has been influenced by the UK and currency."

Interestingly, in a sweepstake poll of 125 delegates at the INREV conference, not one person was able to correctly guess what the overall return of the institutional index would be, according to Lisette van Doorn, chief executive of INREV - a move she said meant the real estate market was thrown at the moment by events "we are not even able to present a sensible forecast of the industry after the year has finished".

Predictions about the true returns for the non-listed market varied from -9.1% to 29%, further suggesting "this looks more like gambling rather than experts in an industry", she added, suggesting one of the reasons may be greater transparency is needed to understand what is happening inside unlisted real estate funds.

"How long do you think you can convince your clients to invest more money in real estate, when there is competition from other asset classes? People generally want to learn from the past, but there is also a clear message you must learn from the markets. There is only one way you can develop proper risk models for non-listed real estate funds: if fund managers provide proper data for your funds and adopt the INREV guidelines such as those on the net asset value," she added.

Had INREV maintained the focus on its All-Funds index, the return would have been 0.4% according to Carpenter, but the body believes it is now more appropriate to apply data only to the institutional investments its members are interested in, she suggested, rather than the entire market.

At the same time, real estate officials also warn circumstances are unlikely to improve in the short-term as interest in real estate is still high but the liquidity and availability of good investment potential has significantly reduced on the back of the credit crunch.

Georg Allendorf, managing director at RREEF Spezial Invest in Germany, revealed results from its investor capital survey indicate European non-listed real estate funds raised by €8.6bn from investors, but were only able to place €5.9bn, or 69% of the capital raised, because of reduced investment opportunities.

"85 funds raised capital in 2007 and the amount raised has increased, but what has decreased somewhat significantly is the amount invested. For 2008, two-thirds of fund managers that have been raising capital in 2007 expect to raise more in 2008 and we believe very strongly this is because of market conditions."

However,  Michael Morgenroth, a member of the management board at Gothaer Asset Management - a fund of funds manager, said he believed it was good the funds were not willing to place their capital at this time, even if it means funds may not see significant returns.

"The fact they would not be able to place the assets is good," said Morgenroth.

"We are more happy with fund managers saying they can't place it than risk the money. But this could also be because there has been a drop in quality of the properties. The market is slowing down. The base from which fund managers are investing is slowing more than in 2007. Prices are more attractive and there are more opportunities for investors, but sellers are waiting for better times," he continued.

Allendorf also added: "Distressed [debt] sellers have problems because of the financial conditions and the need to sell. But if they are not forced to sell, they will sit on the sidelines.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email