Specialist funds have outperformed balanced funds for seven consecutive quarters, largely due to higher gearing and superior income returns, according to new data released by the Association of Real Estate Funds (AREF).

However, returns from specialist funds are more volatile than balanced funds: in quarter 2 2011, every balanced fund saw a positive total return. Specialist funds are displaying higher distribution yields compared to balanced funds. The gap in average distribution yield between specialist funds and balanced funds is the largest since yields peaked in Q2 2009.

The AREF Investment Quarterly also reveals that property funds have significantly reduced their leverage. Highly-levered funds have reduced their loan-to-value (LTV) ratios by 42%, from 87% in Quarter 2 2007 to 45% in Quarter 2 2011. The IQ also shows that in Q2 2011 leverage has done nothing to boost returns.

With a net asset value of £34 bn at the end of June 2011, UK unlisted pooled property funds (PPFs) experienced net flows of £293 mln in Q2 2011, £105 mln up on the previous quarter, but below the quarterly average of £404 million for the past twelve months.

New money raised in Q2 2011 totalled £609 mln, the first quarter-on-quarter increase since Q4 2009.