Liquidity ratios climbing at German open-ended funds

It's only a few years ago since the German open-ended funds industry was in crisis leading to widespread liquidations – due to a lack of liquidity. The sector is suffering again, but this time for the opposite reason – a surplus of liquidity – as a new report from Berlin-based rating agency Scope highlights.

The Scope researchers examined the change in liquidity ratios for all the eighteen open-ended property funds issued to private investors, with total combined assets of €77.7bn. They found that in the last year, the average gross liquidity ratio (weighted by fund assets) rose significantly from 21.0% to 22.9%, corresponding to an absolute increase in liquidity of €3.0bn.

For older funds pre-dating 2013 a liquidity ratio of 20% is generally deemed more than adequate, while for newer funds – established since then and requiring a year's notice for funds withdrawal, 10% is seen as appropriate.

Of the largest and established funds, UniImmo: Deutschland (28.4%) and Commerzbank's hausInvest (25.4%) had the highest liquidity ratios. At the same time, hausInvest also had the strongest increase as its liquidity ratio more than doubled, from 11.8% to 25.4%.

The reason liquidity is rising is that, given currently low interest rates, many investors are viewing open-ended property funds as a lucrative investment. Although these funds currently only yield 2.3% p.a. on average, this is still significantly more than the returns on bonds from issuers with high credit ratings. Hence the record net inflows accumulated by all open-ended real estate funds last year, at almost €7bn.

However, in the current market, finding suitable properties to buy is difficult, and so net inflows are translating into higher liquidity ratios. Funds are reacting by restricting funds inflow to investors; only Commerzbank's hausInvest and Deutsche Bank DWS's Grundbesitz Global have currently no restrictions. The fund managers are using surplus inflows to repay debt on their assets, with average leverage now at a mere 15%.

For 2017 Scope said it expects both investors and issuers to sustain their interest in open-ended property funds. According to a recent survey, two-thirds of issuer respondents consider this year’s sales potential to be 'good' or 'very good'. In Scope's view, demand will remain high until interest rates rise noticeably and bond yields recover, which will lure back investors using open-ended property funds as a substitute for term deposits. Fund managers will remain challenged to limit cash inflows and manage their liquidity until then.