Fund Performance Picked Up in First Quarter

High-yield funds posted their strongest returns in the first quarter since the market nosedived.

Of 98 closed-end funds reviewed by Real Estate Alert, 53 recorded a gain in net asset value from January to March (see list on Pages 9-11). The 54% profitability rate is the highest since the collapse of Lehman Brothers in September 2008 marked a sharp downturn in commercial real estate. The previous high-water mark came in last year's third quarter, when 36% of funds posted positive returns.

The figures are based on performance reports that were distributed to investors in recent weeks. Funds report their results on a lagging basis.

It's too soon to conclude that the market has hit bottom. But there was evidence that performance picked up, especially at U.S. funds. Some 60% of U.S. vehicles posted positive returns, roughly double the rate throughout 2009. The uptick could reflect in part the impact of sales completed in the first quarter, gains on investments made at a discount after the market collapsed, and increases in property values in select markets.

With signs emerging that U.S. real estate markets are starting to bottom out or, in some cases, already reviving, the potential exists for funds with dry powder to build on their first-quarter returns. Nevertheless, most funds still have a large hole to dig out from. Just 26% of the funds reviewed have posted positive returns since inception.

The highest first-quarter return among the reviewed funds was recorded by a vehicle that invests in India: the $525 million IL&FS India Realty Fund, which is sponsored by IL&FS Investment Managers of Mumbai. The vehicle, which invested from 2006 to 2008, gained 43.1% in the first quarter and 15.1% since inception.

Among U.S. vehicles, the top performer was the $500 million Fillmore West Fund, sponsored by Fillmore Capital of San Francisco. The fund, which invested from 2008 to this year, showed a 31.3% return in the first quarter, but has a negative 77.4% return since inception.

The weakest performer in the first quarter was Integral Urban Fund 1, a $150 million vehicle sponsored by Integral Real Estate of Atlanta. The fund, which invested from 2006 to 2009, posted a negative 47.9% return in the quarter and has a negative 93% return since inception.

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