The effect of sector specialisation on unlisted real estate fund performance amid economic downturns

Abstract This study focuses on the relationship between fund performance, sector specialisation and the state of the economy in the unlisted European real estate fund sector. We construct a sector concentration index to measure the impact of sector specialisation on unlisted fund performance, measured by total returns, in Europe. Using the INREV database, our sample draws from 634 private real estate funds investing in European countries over the period 2000 to the end of 2021. After controlling for key factors influencing fund performance, we find a positive and statistically significant relationship, at the 10% level, between sector specialisation and fund performance. Specifically, fund managers who concentrate their resources on a smaller number of sectors tend to achieve stronger performance, and this result is not driven by any particular sector. An implication of this study is that the results could be conditional to the method selected to measure sector specialisation. A consistent finding across specifications is that a recession has a significant adverse impact on fund performance. The positive relationship between fund performance and total returns is weakened during recessions; however, this finding is not statistically significant. These tentative findings are particularly relevant for sector-specific funds, which lack the mandate to diversify into other sectors. To protect performance during recessions, such funds may need to consider alternative de-risking strategies, including increasing geographical diversification, optimising tenant mix, and deleveraging.