Germany's investors like to play it safe: out of the good €23 billion in net savings they entrusted to open-ended retail funds between January and November 2018, nearly €6 billion flowed into open-ended retail real estate funds. Equity funds – which, with a 36 percent share of the €3 trillion making up the total assets of all the German open-ended retail funds, are still the most popular investment vehicle for private investors – only managed to post just under €2 billion. Only mixed funds, which distribute the capital among several investment and risk classes including stocks, fixed interest securities, precious metals and real estate, delivered better performance. They were the absolute peak performers for German investors with net inflows of €21 billion in the first nine months of last year.
The previous buy-and-hold strategy has meanwhile given way to very active management.
The real estate fund sector may take the preliminary balance sheet for financial year 2018 as a vote of confidence and confirmation of its direction. Indeed, the total assets in open-ended retail real estate funds have climbed significantly since 2014 and are currently at a record level of nearly €100 billion. In addition, institutional investors like insurers and pension funds are delivering impressive growth figures for the industry. Over the last 10 years, the net asset value of open-ended retail funds for institutional investors has quadrupled to €86 billion currently and thus is not far behind the total assets in the sector’s retail funds (see graphic).
Good news, then, for the beginning of the year in which the German open-ended real estate fund is celebrating its 60th birthday. The product, launched in 1959 by Internationales Immobilien-Institut GmbH as iii-Fund no. 1, has obviously lost none of its vitality. Quite the contrary. It has emerged from the crises of previous decades stronger than ever – especially the global financial market crisis of 2008, when a large number of primarily institutional investors withdrew large sums of money from open-ended real estate funds at the same time. This caused liquidity issues that required some of them to temporarily suspend the redemption of fund units. Not all of them got back on their feet in the years that followed.
However, those who mastered the crisis learned valuable lessons from it – not least because of requirements and guidance from regulatory changes made by German lawmakers. These include this clear separation of funds for private and institutional investors, the introduction of minimum holding and notice periods as well as the proactive control of inflows by investment management companies themselves, which meanwhile proactively allocate multiples of reissued fund units.
Valuation discipline has proved to be successful
In particular, a great deal has changed in the investment and management strategy of real estate investment companies over the last ten years. “The previous buy-and-hold strategy has meanwhile given way to very active management,” says Reinhard Kutscher, Chairman of the Management Board at Union Investment Real Estate GmbH. For example, the average age of all the properties in Union Investment’s open-ended real estate funds is just slightly over twelve years old, impressive evidence of an accelerated, but above all consistent approach to acquisition and sales management. “Portfolio analysis has become a constant, ongoing process,” explains Kutscher. Aspects such as the sustainable profitability of a property are taken into consideration along with its position in the typical property lifecycle and the results of the individual regional market activity analysis.
“In addition, the industry has recently made a major effort to establish sensible risk management strategies suited to real estate investment and to implement appropriate tools,” emphasizes Kutscher. “Our industry will continue to pursue this objective in the coming years very systematically.” The high value stability of shares in open-ended real estate funds is supported by the valuation practices of independent appraisers who have to assess the value of every fund property prior to acquisition and afterwards at least once per quarter. This practice is aimed at sustainable, achievable yields and a long-term perspective. In light of the continued strong global interest in real estate investment and the resulting rising purchase prices, property valuations for German open-ended retail real estate funds have been growing since 2015, and the change-in-value yields along with them. “However, the increase is growing at a much slower rate than global price increases in property markets,” confirms a study by Scope Ratings agency on the conservative valuation practices in the industry.
This valuation discipline – which always keeps in mind the long-term consequences of short-term fluctuations, both upward and downward – has more than proven itself over the last six decades in the eyes of fund investors, emphasizes Kutscher. “The performance of open-ended real estate funds has almost always significantly exceeded the inflation rate during this period” (see graphic). Kutscher is convinced that this performance combined with the comparatively high level of safety with this investment form is an impressive sign of strength for the open-ended real estate fund – even more so at the beginning of its seventh decade of existence.
By Anne Wiktorin