The UK’s non-listed real estate sector has been identified as the “obvious weak link” in an otherwise robust performance from European property in Q3, with returns lagging behind its counterparts on the continent.

The UK delivered a total average return of 0.3% during the third quarter this year, recovering from -1.8% in Q2, according to the latest Inrev quarterly asset level index. Its capital growth remained negative.

The increase was largely driven by industrial and logistics as well as improvement in retail, with both sectors accounting for more than half of the UK’s index.

Germany, France and the Netherlands all reported quarterly total returns of between 1.67% and 1.77%, bringing their 12-month rolling total average returns to 9.37%, 7.35% and 5.78% respectively.

Total returns across the continent’s non-listed funds moved back into positive territory, posting a 1.2% total return. This was mainly driven by positive capital growth, which rose by 146bps quarter-on-quarter to 0.26%. Income return inched up to just over 0.9%.

Industrial and logistics was the best performing segment, delivering a total return of 3.1%, compared with 0.1% in the second quarter. The residential and office sectors posted total returns of 1.8% and 1.1% respectively in Q3.

After five consecutive quarters of negative performance, the retail sector delivered a total return of -1.1% in Q3, up from -3% in the previous quarter.

Inrev’s quarterly fund index showed that quarterly return has improved to 0.9%, from 0.7% in Q2. Core funds drove this performance, with total return up to nearly 1%, from 0.6% in the previous quarter. Value-added funds improved but remained in negative territory at -0.5%.

It comes as transaction volumes over the first three quarters of 2020 declined across the board, according to Real Capital Analytics. However, for Germany the year-on-year decline was relatively limited at -4.3%, compared with the -17.9% decline for Europe overall.

Iryna Pylypchuk, director of research and market information at Inrev, said: “Germany led the performance as a target single country strategy, while industrial and logistics and residential segments performed well across all markets, including the UK, which remains the obvious weak link in terms of overall performance.

“A significant decline in the use of material uncertainty clauses is an early indicator that we should see an uptick in investment deal volumes and liquidity both in Q4 2020 and into 2021.

‘However, at an individual market level, the UK is the obvious weak link. With diminishing investor confidence across many market segments, currency challenges and the looming pressures of Brexit, its prospects for 2021 look decidedly less encouraging.

“That said, even in the rest of Europe, given the on-going restrictions in many European countries, the upturn will be most visible in markets that have a large established local institutional investor base and with activity revolving around existing relationships.”