German funds avoiding UK, but still see rising risk profile

A new report from rating agency Scope paints a healthy picture of the German open-ended funds sector, with nearly 60% of public funds expecting net new inflows this year of more than 5% of total managed funds.

Of the 19 fund initiators surveyed, with a collective €190bn of funds under management, more than 80% responded in May this year that they would describe their prospects as “good to very good”. Nearly 30% of managers plan to launch further public open-ended funds over the next three years.

However, the Scope analysts point out in a separate report how the risk profile of German open-ended real estate funds is rising as asset managers seek higher returns. The funds’ risk profile has risen as asset managers, faced with “continued strong investor inflows given the low-yield market environment”, seek higher returns in new property developments and less liquid markets.

The report’s ratings, which reflect the risk-return ratio of open-end real estate funds compared with alternative investments, surveyed 20 funds with €90bn assets in total. Seven of the funds were for institutional investors.

Risk in the funds have increased on average, as managers increase investment in new property developments against a background of high market prices. The rising risks in individual sectors such as shopping centres are highlighted in the report, although the higher average risk profile of the funds has been offset by rising returns. It concludes by expecting further strong demand for real estate funds through this year, “given the attractive returns in the current environment”

One market that the funds have reduced their exposure to is the UK, given the uncertainty surrounding Brexit.

Last year the German open-ended real estate funds invested €7.8 billion in new properties last year, around 6 % less than in 2017, as asset managers sharply reduced investment in the UK. 

The UK’s share of the total investment volume more than halved – from 21% to 10% – among the 15 open-ended retail property funds, examined by Scope, whose portfolios consist predominantly of commercial properties.

Overall in 2018, the funds acquired properties in 18 different countries. Germany was by far the most popular location, accounting for nearly €3 billion, or around 39% of the total investment. The proportion of investments in US real estate also declined, falling to 13% in 2018 from more than a third as recently as 2016, partly reflecting the rise in cost of currency hedging.

Three of the funds accounted for more than half, or €4.3 billion, of the total investment volume in 2018: Commerzbank’s hausInvest was the most active fund, investing €1.8 billion. Deka-Immobilien Europa ranked second, investing more than €1.6 billion in new properties. WestInvest InterSelect, the third-strongest buyer, invested €946m in 2018.

The funds continued to shift their portfolios to office from retail property. Office properties accounted for around 69 %of investment, up from 67% in 2017. This further increased the funds’ overall exposure toward the sector which stood at 63% at the end of 2018. In contrast, only 18% of new investment was in retail property, compared with a portfolio share of currently around 25%.

Investments in project developments increased significantly in 2018 to hit a five-year high of €1.2 billion, more than double the €480m invested in new projects in 2017.