Strong income returns of 1.3% helped the non-listed real estate funds sector deliver an improved performance in the final quarter of 2010 with total returns up on Q3 to 1.9% from 1.6%, according to the latest INREV Quarterly Index.

In local currency, total returns likewise trended upwards on the previous quarter with funds in continental Europe rising 1.5% (from 1.2% in Q3), driven by strong income return, and UK funds hitting 2.4% (up from 2.2%) signalling a stabilisation of the market. Gains were also seen across fund styles. Value-added funds rose sharply from 1.6% to 2.4%, thanks largely to strong capital growth of 1.2%. Core funds edged up slightly from 1.6% to 1.7%.

Overall income returns rose from 0.7% to 1.3% in Q4 with funds in continental Europe moving up from 0.7% to 1.6% over the same time period, and income returns in the UK remaining at 0.8%. This quarter's positive income returns from continental Europe compare to a more stable picture seen in the UK, which can be explained by the fact that a substantial number of funds in continental Europe pay out dividends at the end of each year whereas a majority of UK funds pay dividends on a quarterly basis.

The INREV Quarterly Index shows no, or very slow capital growth across geographic regions. In fact, funds in continental Europe have experienced a backward slide in capital values, slipping from 0.4% in Q3 to -0.1% now.

'The latest Quarterly Index shows a mixed picture. Total returns have increased over the past two consecutive quarters which is good news for the non-listed real estate funds sector overall. But the lack of capital growth hints at a generally weak recovery in markets across continental Europe,' said Casper Hesp, INREV's senior research manager.

Funds in the UK saw the best capital growth at 1.6%, almost equalling the performance of the previous quarter (1.5%), and following strong performances of 5.5% and 2.6% in the first and second quarters, respectively. These capital growth figures suggest that the UK market is stabilising, following periods of higher volatility.

'While this quarter's results are broadly positive, the key question is whether we will see capital growth across all funds over the next year. INREV's Investment Intentions Survey 2011 revealed that 55% of investors intended to increase their allocations to the non-listed real estate sector. Whether or not these intentions are realised will be influenced by positive total returns to which capital values make a significant contribution,' added Hesp.