German open-ended real estate funds hit a record €89.2 billion ($110 billion) in assets under management in 2017, as higher yields relative to other investment options continued to draw investor interest.
Scope Analysis, which has examined the open-ended fund market in Germany, has also warned that managing fund liquidity will be an ongoing challenge for providers.
Capital inflows into active funds amounted to almost €6.7 billion ($8.3 billion) in 2017 as fund returns averaging 2.8 percent continued to offer outperformance relative to fixed-term deposits or high-quality bonds. Scope says that it does not expect strong demand for open-ended real estate funds to subside until interest rates rise and other investments start to provide better returns.
Scope’s analysis of liquidity ratios at the 18 most relevant funds in the German sector issued before 2017 reveals that, despite active investor interest, the average liquidity ratio as weighted by fund assets actually fell last year to 21 percent from 22.2 percent.
The company says that fund managers looking to limit liquidity have three potential options: Repay outstanding debt, stop accepting new money from investors, and offset net capital inflows by reinvesting and purchasing real estate.
Funds issued prior to the introduction of the German investment code (Kapitalanlagegesetzbuch or KAGB) in 2013 have different liquidity ratios compared to those issued after the implementation of the KAGB.
Older funds, which include the largest funds in the sector, have a high proportion of investors who invested before the KAGB. Because they can liquidate up to €30,000 ($36,982) in every six-month period and at any time, funds with a high proportion of old investors have to hold more liquidity to account for unpredictable capital outflows. Scope believes a liquidity ratio between 15 percent and 20 percent is appropriate for these funds.
Funds issued after the KAGB are subject to a minimum holding period of two years and a one-year notice period. It is therefore easier to estimate capital outflows. Scope considers a liquidity ratio of 5 percent to 10 percent appropriate for such funds.
