Liquidation of German open-ended funds to create €20bn of opportunities

A new report published by property services group DTZ claims that German open-ended funds (GOEFs) will be forced to sell European assets worth €18.4bn before 2017 as they dispose of mainly commercial real estate. According to the report, forced sales will likely represent 8% of annual investment volumes, with the main question being, to what extent the ominous presence of so much sell-side activity will exert price pressure on European real estate markets over the coming five years.

Since their return to the market in 2010, GOEFs have sold €5.7bn of assets across Europe. They have mainly been active in the office sector (€3.9bn) with a heavy weighting on the German, French and UK markets. DTZ’s report reveals that GOE Fund portfolios to be sold currently account for €20bn globally, with the biggest volumes coming from CS Euroreal (€5.3bn), SEB ImmoInvest (€4.8bn) and KanAm Grundinvest Funds (€3.5bn).

Magali Marton, Head of CEMEA Research at DTZ and author of the report, commented: “The key question is whether local markets can absorb these future sales without a negative impact on pricing. We estimate that forced sales in Europe between now and April 2017 will account for €18.4bn. Furthermore, GOE Funds forced sales will represent 8% of European annual investment volumes with core markets including Germany, UK and France showing a 5% ratio. In Southern Europe, and Benelux these sales represent a more significant 12% to 29% ratio respectively. As a result, targeted pricing will be more difficult to achieve in these two regions.”

Assets to be released by 13 funds currently in liquidation, and five funds frozen until latest June 2013 could create a decline in capital values driven by oversupply in the Benelux countries, which account for 28% of the office assets likely to be sold, and Southern Europe. Pricing in the German market, which accounts for 30% of office assets, will be affected to a lesser extent, the report says.

Magali continued: “As of September 2012, 612 properties around the world were held by GOEFs in trouble. These portfolios account for over 9 million sqm of leasable space, of which 8.2 million sqm is located in Europe. The office sector is the favoured property type across the portfolio of GOEF in liquidation. The retail sector ranks at the second position in GOEF allocation with 1.6 million sqm of space. For both property types, the majority of assets are located in Europe.

“Predicting the market participants of these forced sales by GOEFs is always difficult. In this continuing uncertainty, investors operate with a high level of selectivity and a clear focus on the highest quality, most liquid assets in the core markets. We expect the same approach to opportunities presented to the market by GOE Funds.”

Certainly what does seem to be the case is that the insolvent German funds that have taken the decision to unwind themselves have been having difficulties in selling off their assets, and have failed to generate enough liquidity to meet their payout schedules to erstwhile investors. Aberdeen Immobilien KAG, for example, recently postponed a scheduled payout because of a delay in closing on sales.

Berlin-based rating agency Scope also highlighted recently how Degi Europe and Morgan Stanley’s P2 fund have so far only paid out a third of their fund volume, although it’s two years since the funds were frozen, and liquidation was supposed to take a total of three years. The speediest fund to liquidate has been KanAm’s US-Grundinvest, which pulled out all the stops and paid back 84.5% of the fund volume within only a few months.  Obviously for the other funds, Europe is proving altogether slower.

Meanwhile, pricing does remain an issue for German banks’ property loans, according to Corestate Capital chief executive Phillip Burns, who believes it could take 5-10 years to work out German distress.

Speaking at the IMN European Real Estate Opportunity & Private Fund Investing Forum in London last week, attended by REFIRE, he said, “It eventually needs to be worked out, but there continues to be an unwillingness or inability for the bank to take those losses.”

“Pricing continues to be an issue because the banks can't necessarily afford to take the write-off. They're trying to build capital ratios, not eat into their reserves. It will continue to be worked out, but slowly. If it takes more time, the regulators will delay implementation. If you look at the closed-end funds, initially, the rules stipulated three years for liquidation. Now, for the very large ones, it's five years. Regulators will continue to be pragmatic.”

German banks will likely prove reluctant to offload property debt in 2013, opting instead to mothball non-performing assets amid low funding costs, according to Gifford West, managing director of international operations and business development at DEBTX, speaking at the same conference.

"There's a staggering amount of supply in Europe, but it's stuck. There are smaller transactions coming out of banks, but we're not optimistic for big transactions in 2013,” he said.

“There's a question mark over Germany because the big holders are not in a rush to sell. They may have unloved assets, but funding costs are low. For the buy-side, the trick is to figure out which assets are most unloved.”