Performance Drivers of United Kingdom Unlisted Real Estate Funds

An unlisted real estate fund is a private investment vehicle, which aims to provide direct real estate total returns and may also employ financial leverage which will accentuate performance. They have become a more prevalent institutional real estate investment conduit since the early 2000’s. Investors have been primarily attracted to them due to the ease of executing a real estate exposure, both domestically and internationally, and for their diversification benefits given the capital intensive nature of constructing a well diversified commercial real estate investment portfolio. However, despite their greater prominence there has been little academic research conducted on the performance and risks of unlisted real estate fund investments. This can be attributed to a paucity of available data and limited time series where it exists. In this study we have made use of a dataset of institutional UK unlisted non-listed real estate funds over the period 2003Q4 to 2011Q4, using a panel modelling framework in order to determine the key factors which impact on fund performance. The sample provided a rich set of fund factors including market exposures, direct real estate characteristics and the level of financial leverage employed. The findings from the panel regression analysis show that a small number of variables are able to account for a significant proportion of the performance of unlisted real estate funds. These variables should be considered by investors when assessing the risk and return of these vehicles. The impact of financial leverage upon the performance of these vehicles through the recent global financial crisis and subsequent UK commercial real estate market downturn was also studied. The findings indicate a significant asymmetric effect of employing debt finance within unlisted real estate funds.