High leverage has been "horribly damaging" to the performance of European property funds over the past decade, according to new research from the Urban Land Institute (ULI).

Large amounts of debt in funds boosted performance during the boom years, but is currently eating into returns. Opportunity funds, which typically have gearing of 60% or more, saw an decrease in returns of 2.2% per year for every 10% of debt in the fund. This is the equivalent to 13.2% per annum for a fund with an LTV of 60%. Value-add funds, which tend to have LTVs of 40-60%, outperformed the IPD index between 2001-07, saw returns fall by 2% for every 10% of debt between 2008 and 2011.

Professor Andrew Baum, academic fellow of ULI Europe and one of the authors of the report said: "The performance of property funds over the past decade is a complex picture, with returns impacted upon by a range of factors, including fund vintage, style and structure.

"However, the asymmetric effect of leverage, horribly damaging in the downswing, has had a huge impact on investor returns and value that has been created by intelligent asset management has in many cases been destroyed by the way in which the fund has been financed."

The research, titled Have Property Funds Performed? was based on the performance of 169 European property funds.