Demise of pure retail funds evident in latest Scope analysis

As we report elsewhere in this issue of REFIRE, studies from both property adviser Savills and fund manager Wealthcap have identified a shift from commercial to residential – and preferably German residential – among investors looking ahead to a changing real estate environment.

Now rating agency Scope has updated its own analysis of the range of property funds in which German institutional investors can currently invest. There has been a significant shift in the focus of types of use since the last similar survey in 2018.

Between February and May of this year, Scope questioned 22 asset managers in depth on their current range of indirect real estate vehicles. The respondents named 52 alternative investment funds available for investment, with a planned equity volume of the funds of more than €42 billion.

Around 40% of the funds have a broad investment focus on Europe. More than one third of the funds concentrate purely on German real estate, followed at a good distance by funds with a global strategy, as well as the investment objective USA. 

With 14 funds, the ‘office’ type of use has the largest number on offer. This is followed by residential real estate (10 funds), funds with mixed or several types of use (10), micro- and student apartments (6), hotels (4) and logistics (2). 

The ten funds focused on residential however make up 31% of the targeted equity capital, while the 14 funds focused on office represent only 22% of the targeted equity capital. About 4% of the equity capital is targeted at the 4 micro- and student apartment funds.

Notably, not a single fund now focuses purely on retail real estate, which was the third most popular category two years ago with 15 separate funds – a testimony to how the asset category has fallen out of favour in such a short space of time. These have now been blended into so-called mixed category funds

34 of the 52 funds and together more than 80% of the equity target volume invest in the low-risk "Core" risk category. Another twelve funds focus on "Core+" strategies. Only six funds said they will invest in properties with the "Value Add" risk profile or investment strategy.

49 of the 52 funds have provided information on expected returns, with 34 of these funds using the IRR method and 14 funds favouring the BVI method. The average expected return of the funds using the IRR or BVI method is 6.8% and 4.1% p.a. A fund focusing on German residential real estate bases its expected return on the distributable result.

Separately, figures released by Germany’s financial watchdog BaFin show that nine new closed-end public mutual funds (AIFs) were approved in the second quarter of this year. There were six in the first quarter, with an equity volume of €221m, an increase of 8% over the same quarter last year. Compared with last year, the number of approved funds rose from 13 to 15, but the equity volume stated in the prospectuses fell by 36%. In total, it amounted to around €424 million, down from €660 million in 2019.

The fall in new funds, says BaFin, is due to the coronavirus crisis. The new offering included no large-volume funds with equity greater than €50m, although the forthcoming DF Deutsche Finance Investment Fund 16 – Club Deal Chicago plans equity volume of €47m.

A further recent study by Scope highlights just how popular ‘green bonds’ are becoming. Worldwide, $118 billion of Green Bonds were issue in the first half of last year, an increase of 48% over issuance in the same period in 2018. Interest in investing in the bonds is unbroken, with new issues often heavily oversubscribed. Germany ranked fifth worldwide in its volume of Green Bond emissions. 

By the end of October 2019, a total of 29 Green Bond funds had been authorized for distribution in Germany, with an aggregate fund volume of nearly €5.8 billion – a rise of 150% over the previous year. With the funds having clearly delineated ESG minimum standards, Scope expects the market for more social and sustainable bonds - in addition to green bonds – to grow significantly.