German open ended fund disposals now at record discounts

German open-ended funds (GOEFs) sold €3.3bn of commercial property assets in 2014 at a record discount of -20% against book value, according to research by property adviser DTZ, which has been tracking sales since the sector was hit by massive fund closures.

DTZ's sixth biannual report on the liquidation of GOEFs shows the selling process continues to provide opportunities in a wide range of countries with liquidating funds expected to sell €11.7bn of European assets over the next three years.

German open-ended funds hold €81bn of property assets worldwide – of which €12.8bn (nearly 16%) are to be sold by 2017 as 18 different funds enter their liquidation phase. European assets will account for the overwhelming majority of disposals with the €11.7bn of sales concentrated mainly in Germany (34%), Benelux (22%) and France (16%).

The liquidation of GOEFs has already provided the market with €10bn of sales since 2012. After acceleration in H1 2014, sales volume came back to lower level in H2 resulting in a yearly total slightly below the 2013 volume of €3.5bn.

The geographic focus of sales changed dramatically during the last 12 months. Sales activity in the first half of the year was mainly outside the three core markets but the latter six months showed a strong comeback of Germany and France as the most active markets for liquidation.

While the volume of sales recorded in 2014 remained high, pricing achieved by the liquidating funds declined significantly compared to the start of this process. A 3% premium on 2012 sales has collapsed to a 20% discount for disposals across the last two years.

Magali Marton, Head of EMEA Research at DTZ, commented: “The biggest discounts were recorded for the most urgent disposals from funds that were set to be liquidated in 2014, but we also saw some long-term liquidation in specific countries within Southern Europe, CEE and Benelux. Numerous sales occurred in Germany in 2014 at 14% below their book value, up from 8% just a year ago as many sales occurred in non-prime locations.”

Sales expected in 2015 should be fewer than in recent years. However, target liquidations for 2016-17 are large across Germany, Benelux and France. Nigel Almond, Head of Capital Markets at DTZ, added: “We expect discount on book value to remain high regarding the upcoming sales of liquidating German open-ended funds. This will provide attractively priced opportunities for investors needing to deploy capital across Europe.”

Meanwhile, on the funds inflow side, the open-ended funds sector in Germany is experiencing a renaissance. In December 2014 alone net fund inflows were over €1bn, as yield expectations of 2%-3% are still much preferable to nearly zero on cash deposits, while the perceived risk of the funds is now much diminished in the light of the new regulations governing the sector.

Robin Haber of FERI EuroRating said in a recent newspaper article on the sector, “The open-ended funds crisis was a weeding-out process, which the strongest funds have now survived. Those fund initiators who are still in the market today, are managing funds with a good mix of real estate assets and high levels of tenant occupancy.”