The ongoing deleveraging of unlisted property funds saw gearing as a proportion of gross asset value slip to its lowest in over a decade.
According to the AREF/IPD UK Quarterly Fund Index, fund manager caution over valuations has seen gearing fall to just 14.5%, despite improving returns.
Unlisted property funds in the UK saw returns rise to 1.7% in the second quarter of 2013, as the fall in capital values came to an end and a recovery began to gain traction.
According to the index, long income property funds continued to deliver the highest returns of 3.1%, while specialist and balanced funds returned 1.7% and 1.4% respectively.
Improved valuations saw both specialist and balanced funds deliver positive growth in the value of their direct underlying property by 0.8% and 0.7% respectively.
Comparatively, bonds returned -4.4% over the quarter, and equities -2.0%.
Both have been affected by nervous sentiment surrounding the potential rise of interest rates and the tapering of QE programmes, particularly in the US.
Direct property assets returned 1.9% over the quarter, in line with returns in the unlisted sector, but property equities outperformed in the second quarter, returning 4.4%.
AREF chief executive John Cartwright said: “Much like in the first quarter, we are seeing a slow, steady improvement in the unlisted sector, which is slowly spreading outside the traditionally strong areas. This is an indication of an improving market.
“With gearing continuing to decline, managers remain cautious. What has emerged from six very difficult years is a leaner unlisted sector that seems likely to be more sustainable in future.”
Phil Tily, executive director & head of UK and Ireland, IPD, said: “The positive underlying capital movements for both specialist and balanced funds is yet another sign to add to a growing body of evidence that the UK property market is on the mend.
“Much still depends on regional growth, whether the latest round of austerity cuts will continue to stifle consumer spending, and whether the predictions of economic growth for the UK hold true. It is the beginning of a recovery of sorts, but much still hangs in the balance.”
The AREF/IPD UK Quarterly Property Fund Index, is comprised of 25 balanced, 24 specialist and four long-income quarterly-valued funds, with a combined net asset value of £29.5bn at the end of Q2 2013.