Intreal sees growth in AUM but warns of growing product complexity

Alternative real estate investment fund manager managed to increase the funds it manages by nearly 12% in the first half of this year, by about €6bn to €57.2bn. But it warned that the second half will be a different story, as adverse macroeconomic effects really start to bite, with transaction volumes already falling noticeably.

The Hamburg-based Intreal focuses exclusively on the setting up and managing of regulated real estate funds for third parties, in effect taking over all the work of running the fund without the fund initiator having to set up its own management company.

Over the first six months, Intreal added a further 11 investment funds to its stable to bring its total number of funds to 283, with much of the growth in AUM coming from transactions initiated in 2021, the company said. It also added staff to bring its headcount up to 452.

CEO Michael Schneider commented: ‘We expect the growth to slow down during the second half of the year. The adverse effects will begin to be felt by then. For instance, we have noted a decline in the number of transactions. Moreover, the new business volumes in all of our divisions experienced a slower growth during the second quarter than the pace still seen during the first quarter.’

Schneider said he still believed that real estate's inherent resilience would prove decisive in the face of tougher times ahead. ‘We've seen the inflation protection and wealth preservation aspects of real estate being sort of relegated to the background in recent years. With the changed situation now, however, commercial properties in particular with their indexed leases are a reminder that real estate can, to a certain degree, protect you against inflation, and that it offers stable asset value in volatile times while generating continuous cashflows on top of it. And active management is a key prerequisite for making a success of it,' he said.

Not only active management, but the advisory function by companies such as Intreal will become increasingly important as the regulatory environment for funds becomes more complex, says Schneider. From August 2nd, the EU Markets in Financial Instruments Directive (MIFID II) has come into force, making it now compulsory for fund providers to actively ensure their clients are fully appraised of their degree of sustainability preferences, and to provide them with the appropriate products.

This is not going to be easy, says Schneider, as the product providers have to provide the sales side with the information it needs to accurately match specific characteristics to target buyers' specifically-defined ESG goals.

So far it's been sufficient to categorise a fund as green under Article 8 or Article 9 of the EU Disclosure Regulation. But the new MIFID amendment is not fully aligned with previous ESG regulations, meaning that existing Article 8 funds could have to be upgraded to so-called Article 8-Plus funds if they were to be marketed as sustainable under the new MIFID rules. Many investors are theoretically in favour of investing at least half of their portfolio into existing products, according to a recent study by PwC, but are finding it hard to do so, or to understand the latest directives.

The complexity of the new regulations, which make distinctions between four sustainability preferences, are simply baffling for a great many investors. Explaining the differences and variety among products for fund and investment advisors is expensive and time-consuming, say many in the industry, and it's not clear how much all this added advisory burden will lead to better asset allocation. Still, the number of sustainable funds has grown strongly - and Intreal's Schneider is obviously optimistic that investors will eventually learn to distinguish between the categories of funds on offer.

Interestingly, figures released by Scope rating agency show that in the first half of this year, financial watchdog BaFin approved twelve closed-end funds for distribution, almost all of which had little or no specific reference to sustainability.

Among the twelve, with an issue volume of €600m, are eight closed-end real estate mutual funds. Of these, six invest in Germany, with the other two investing in the USA. The rest are private equity funds, two of which also have a real estate connection.

What's notable is that only two of the twelve new funds are classified as Article 8 under the EU Disclosure Regulation, with a weighting towards environmental or socially desirable goals, as well as providing an economic return. None of them are what would be described as an Impact Fund. But the others are all so-called Article 6 products, without any loftier criteria, except for one Article 8 fund (from Patrizia). Two funds from Deutsche Finance, which make up half the total volume, are Article 6. Noteworthy.