Germany overtakes US to become a Mecca for open-ended funds

Germany has overtaken the US to become a Mecca for open-ended retail real estate funds, accounting for €2.3b, or 25%, of investment last year, according to research published this month by Berlin-based consultancy, Scope Analysis.

‘Germany has overtaken the US due to the high hedging costs, which makes it more expensive to invest there,’André Fischer, head of content communication at Scope, told REFIRE. ‘When we spoke to fund managers, they told us that was the primary reason for investing less in the US market last year. Nonetheless, it marks a big shift because in 2016, the US accounted for a third of all real estate fund investment.’

The UK claimed second place with €1.7b, or 18%, followed by the US, with 16%. Some funds exploited recent Brexit-inspired price corrections in the London real estate market to acquire property.

High inflows coupled with a bid to stem excess liquidity drove the 19 German open-ended retail real estate funds evaluated by Scope to increase investment by 50% last year, with a combined total of €9.2b across 66 commercial properties and 324 residential ones. The average price paid for properties went up by a quarter, reflecting strong market demand. The average purchase price paid by German open-ended real estate funds was €129m last year, up from €103m in 2016. ‘This is largely because such funds have so much liquidity that it makes sense to buy the largest assets they can,’ said Fischer.

Even though many funds imposed limitations on new capital, net inflows were still in the region of €6.7b, forcing fund managers to invest to prevent returns being diluted. To improve returns, many fund managers moved away from traditional assets, such as offices, to project development and locations outside city centres, according to Scope.

Although office properties have always been the mainstay of open-ended real estate funds – accounting for 60% of investment last year – hotels have rapidly become an asset class to be reckoned with, accounting for 13% of deals last year, up from just 3% in 2014.

‘Hotels are becoming very popular,’ Fischer said. ‘We see that investors are going up the risk curve in the hunt for yields and it’s hard to find offices. Classic core objects in prime locations are scarce, so we’re also seeing funds invest in B locations and in some development projects.’

Trouble in the retail sector has also trickled down to the investment market, with retail deals accounting for just 18% last year, the second consecutive year that they have been below 20%. (ssk)