German closed-end property AIFs bounding back strongly
After a lengthy period in the doldrums, the market for German closed-end property AIFs has been making a steady return to its traditional growth path.
Figures published by the Deutsche Bundesbank in September show that the segment has recorded growth of around 17% over the past two years. Net fund assets increased from €18.4 billion in September 2015 to around €19.5 billion one year later and around €21.5 billion in September 2017. The Bundesbank statistics do not make a distinction between closed-ended special AIFs and closed-ended retail AIFs.
According to Michael Schneider, Managing Director of the IntReal Service KVG platform, commented: "The net fund assets of €21.5 billion also include legacy funds from before the AIFM Directive was implemented. As such, the growth in the industry is attributable mainly to newly launched funds in accordance with the German Investment Code (KAGB)."
So, how are closed-ended property AIFs performing in terms of inflows? According to the Bundesbank statistics, closed-ended property vehicles received around €1.4 billion in fresh capital in the first nine months of 2017. After deducting distributions and other returns, this corresponds to net inflows of €685 million. However, the Bundesbank figures do not show the distribution between institutional products and retail products.
Higher inflows for closed-ended special AIFs
"One indication of the distribution between institutional and private capital is provided by the BVI statistics, although they cover only the members of the association and not the market as a whole," continued Schneider. According to the BVI investment statistics, closed-ended property retail AIFs recorded net inflows of around €216 million in the first nine months of 2017. Net inflows for closed-ended property special AIFs were significantly higher at around €365 million in the same period.
Schneider added: "This matches our own view of the market. As a third-party AIFM, we are in a dialogue with various providers on the market and have observed the stronger growth enjoyed by closed-ended property special AIFs. In particular, a large number of institutional investors are using the vehicle for club deals for large-scale individual properties. As a result, we expect this sub-segment to continue to offer the stronger growth potential in 2018."
"The above shows that, while transparency among closed-ended property AIFs has increased, there is still room for improvement. I hope that there will be more detailed data requests and data deliveries so that the opportunities for analysis, and hence the statistical information about the market, will become even more valid in future. After all, transparency is an important factor in terms of investor confidence."
The Bundesbank records data for around 1,500 closed-ended property AIFs
All AIFs must be registered with the Deutsche Bundesbank. The September statistics cover a total of 1,528 closed-ended property AIFs. These funds had a total asset position of around €41.8 billion and total liabilities of €20.3 billion, corresponding to leverage of around 48 percent. Net fund assets therefore amounted to around €21.5 billion.
Open-ended and closed-ended vehicles becoming increasingly similar
Schneider commented: "Leverage is relatively low at under 50 percent, a level that typically applies only to open-ended property special funds. This reflects another trend on the market: Open-ended and closed-ended property AIFs are becoming increasingly similar at a structural level, e.g. in terms of their equity components. This tendency is further illustrated by the fact that many closed-ended AIFs offered to private investors are being launched as risk-diversified semi-blind pools that successively build up portfolios comprising multiple properties."
Despite their growth, closed-ended property vehicles continue to lag some way behind open-ended property AIFs. By way of comparison, the Bundesbank capital market statistics show that open-ended property retail funds have net assets of €87.3 billion, while the figure for property special funds is €82.6 billion. Since the start of 2015, Deutsche Bundesbank has published extensive monthly information on closed-ended AIFs and the separate sub-category of property AIFs, thereby closing an important information gap.