The Performance Gap in UK Property Returns

This study provides the first evidence on the magnitude of the difference between returns to UK property investors and the returns achieved by the property assets, i.e. the performance gap. Using historical return data for 45 market-segments over the time period 1981-2009 this paper shows that the weighted-average performance gap from 1981 through 2009 is -0.49% per annum, i.e. UK direct property investors as a group have shown greater returns than their underlying investments. However, this average value hides a greater deal of variability in the data which ranges from a negative performance gap of -9.1% to a positive performance gap of +2.1%. That is, estimates of the performance of the UK property market based on time-weighted returns do not reflect the experience of actual property investors as a group. We also provide evidence of a significant positive correlation between capital flows and lagged returns, which can be explained by the proclivity of investors to chase winners, which can then prove disappointing. In addition, we show that the persistence in superior (inferior) returns in the UK property market does not automatically lead to a strong negative (positive) gap. Nonetheless, the more time the segment out performs its peers the better the performance investors achieve and visa versa.