An analysis of U.K. property funds classified according to U.S. styles: Core, value-added, and opportunistic

Abstract

This analysis explores the feasibility of sorting UK funds into the three categories that are widely used in the US, and then compares the performance of these styles between the UK and US. Following an overview of several factors’ impact on the expected risk and return of a property fund, we use Loan-to-Value ratio (LTV) as the dominant factor in a preliminary style-classification, defining funds with no debt as core, funds with LTV lower than 40% as value-added, and funds with higher than 50% LTV ratios as opportunistic. Then the study makes some adjustments to this classification based on the observation of the funds’ attributes other than LTV, and the classification ends up with 19 core funds, 22 value-added funds and 21 opportunistic funds. After that, we find two major differences between the UK and US funds. First, the core approach represents a smaller portion of the UK funds than the US funds and the opposite is true for the value-added approach. One way to improve the feasibility of researchers comparing funds within these two countries is introducing a fourth style, core-plus. Second, the US opportunistic funds are better performing with similar leverage than their UK counterparts, while future studies would help draw more precise conclusions about the performance comparisons.