Slow, steady core real estate fund performance in second quarter
Research - AUGUST 1, 2017

Slow, steady core real estate fund performance in second quarter

by Andrea Waitrovich

The National Council of Real Estate Investment Fiduciaries (NCREIF) released second quarter 2017 results for the NCREIF Fund Index – Open-end Diversified Core Equity (NFI-ODCE). The NFI-ODCE consists of 24 funds, totaling $224.1 billion of gross real estate assets and $180 billion of net real estate assets.

Quarterly total NFI-ODCE returns gross of fees was relatively steady through midyear, at 1.70 percent in the second quarter 2017, compared to 1.77 percent last quarter. The income return has been essentially flat for three consecutive quarters and was 1.08 percent in the second quarter. Meanwhile, quarterly appreciation continued its steady downward trend, falling to 0.61 percent in the second quarter from 0.71 percent last quarter and 1.01 percent a year ago.

For the trailing year, the annual NFI-ODCE total return gross of fees was 7.87 percent, down from 11.82 percent for the year ending second quarter 2016 and below the annualized since inception return of 8.73 percent. The annual total return was comprised of a 4.41 percent income return and 3.34 percent appreciation.

NFI-ODCE returns measure fund-level performance and therefore can reflect other investments beyond properties, including cash balances and leverage. Leverage is conservative among these funds given their core strategies, ranging from 15 percent to 34 percent over the quarterly series history beginning in 2000. NFI-ODCE leverage edged down in the second quarter 2017, to 21.5 percent from 21.7 percent last quarter and 22.2 percent a year ago.

Net NFI-ODCE fund flows moved back into positive territory in the second quarter 2017, yet remained negative for the trailing year. Contributions jumped to $4.6 billion in the second quarter, from $2.7 billion last quarter, but below the $5.2 billion contributed to NFI-ODCE funds in second quarter 2016. Distributions/redemptions were also up over the quarter, to $3.9 billion from $3.5 billion last quarter, and down versus $4.6 billion a year ago. This resulted in net flows of $692 million in the second quarter and negative $1.1 billion of net flows for the trailing year.

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