On the Future of Indirect Real Estate Investments

Published on 2013/10/15

To get straight to the point: Indirect real estate investments in Germany are defined by quite a variety of different vehicles, and this is not about to change. Unlike in other countries, where publicly listed companies (including REITs) dominate the market for indirect real estate investments, closed-end and open-ended real estate funds exist side by side with institutional real estate funds and listed real estate companies in Germany.

Recent years have witnessed massive changes. While only two real estate companies were listed in the MDAX stock market index until a few years ago (these being IVG and Euroshop), their number has risen to six listings since, with the combined market capitalisation exceeding ten billion euros. The amazing thing is: Except for Euroshop, all of these companies are residential property PLCs.

If you add up the flats held by these players – Deutsche Annington, Gagfah, Vivawest, Deutsche Wohnen, Patrizia, GSW, GBW, and conwert – you get a total of more than 660,000 units. Their market capitalisation substantially exceeds twelve billion euros. Aside from these major players, you have a number of small and mid-sized listed residential property companies, some of which have embarked on aggressive shopping sprees, e.g. Estavis, Westgrund, and others. It is safe to say that listed residential real estate companies have become a firmly established asset class. And the trend is here to stay. If the merger of GSW and Deutsche Wohnen was to go ahead, it would produce the first DAX listed real estate company in the post-war German history. It would boost the entire segment, and place it centre stage in terms of market awareness.

Striking to note, however, is the fact that the investors of any German listed real estate company are primarily domiciled abroad. To this day, German institutional investors have not warmed to the vehicle of listed property asset-holding companies – no more so than private investors in Germany. The situation calls for a major awareness-raising effort. For whatever reason, private and institutional investors in Germany associate real estate investments with the notion of “stability.” Since publicly listed stock is obviously more volatile than investment funds that are valued just once a year, for instance, private and institutional German investors have largely steered clear of real estate stock. But seriously, is an indirect real estate investment less stable just because you appraise it more often and therefore detect changes sooner as a result.

Institutional real estate funds, then as now the vehicle of choice among German investors, have also grown in recent years. Since the year 2000, when the combined fund volume of Germany’s institutional funds added up to a modest total of approximately six billion euros, the sum total has almost increased by a factor of six. The trend is likely to continue.

While listed real estate companies represent the vehicle preferred by foreign institutional, their German equivalents favour the type of institutional real estate fund called “Spezialfonds” in Germany. Both vehicles have expanded their shares of the transaction market considerably. In the late 1990s, less than five percent of the acquisitions on the German real estate market were transacted by institutional funds. Today, the figures stands at near 14 percent. And listed real estate companies represent the most important buyer group for residential portfolios today, together with foreign investors.

The relative weight of indirect real estate investments by institutional and private investors has shifted. A figure published by bulwiengesa suggests as much: In 1996, nine out of ten acquisitions on the German real estate market were undertaken by the following three groups: closed-end funds, open-ended public real estate funds, and real estate leasing funds. The investors committed in these three groups were predominantly or exclusively private investors. Last year, they accounted for roughly 18 percent of the acquisition volume. Instead, foreign and domestic institutional investors (institutional funds, insurance companies, pension funds, foreign investors, listed property companies) accounted for more than two thirds of the purchase volume in 2012. The shifted weight from private to institutional investors is arguably one of the most significant developments seen last year.

While private investors have not lost interest in real estate investments in recent years, they opt increasingly for direct investments, meaning apartment buildings or condominiums. In my eyes, it would be misguided, however, to write off open-ended and closed-end real estate funds altogether. Between January and July 2013, nearly 3.7 billion euros were paid into open-ended real estate funds. This tops anything seen since 2004, and only the year-end (!) total of 2007 was yet higher. So, 2013 stands a good chance to become the best years in some time for open-ended real estate funds, as far as the inflow of fresh cash is concerned, and this even though a number of funds have closed and are being wound up.

It has previously been proposed from time to time that German open-ended funds (GEOFs) face obsolescence – and each time, the prediction proved wrong. Then again, the sometimes rather sobering results of the wind-ups of several open-ended real estate fund did bring the industry face up with considerable communicative challenges.

So what about the closed-end funds? Placement volumes keep declining year after year, with no recovery in sight. The AIFM Directive will initiate a selection process. I hope that obscure providers will have a harder time on the market from here on out, and that only a certain – and rather small – number of renowned providers will remain in business and split the down-scaled market among them. Here is what these providers will have in common: They focus on real estate and perhaps on one other asset class. The times in which six or seven different asset classes (ships, new energy, private equity, aircraft, etc.) were offered by a single initiator are over. As the example of a company like Jamestown shows, it pays to specialise.

The very term “closed-end fund” will be slowly phased out. The former interest group representing them has already renamed itself, and several initiators have eliminated the term from their homepages. Moreover, the universes of open-ended and closed-end funds are gradually merging.

The providers likely to come out on top are the ones whose competence is focused not on structuring and sales, but on asset management. These die-hard initiators (investment management companies) will limit themselves to products for institutional investors, or products for both private and institutional clients, or else they will concentrate on products specifically designed for family offices, foundations, and high-net-worth individuals. The years 2013 and 2014, in any case, will see a market shake-out and professionalisation in this segment, and its shrunk overall market will present excellent opportunities for the remaining players.

As it were, Germany’s market for indirect real estate investments will continue to be defined by diversity. Listed property companies and institutional funds will keep gaining in importance, with the former favoured mainly of foreign institutional investors, and the latter the vehicle of choice for domestic ones. Looking forward, I believe that a decisive communicative task will be to persuade German institutional and private investors of the sound story of listed property-asset-holding companies.

The interest in open-ended public real estate funds has soared, yet the sector urgently needs to reposition itself through smart communication given the ongoing wind-up of some of its legacy funds.

At the same time, the market shake-out in the closed-end funds segment will continue. Out of hundreds of initiators that used to ply this trade, perhaps one dozen will remain, making the market the exclusive domain of serious players whose asset management competence has always been convincing, and who have always clearly positioned themselves.

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