Quality beats yield in stagnating German closed-end fund business

The market for closed-end real estate funds has traditionally represented a major conduit for German savings into the real estate sector, in previous years competing vigorously with the open-ended funds sector to absorb funds looking for real estate exposure. With time-honoured reluctance to invest in listed property stocks because of perceived higher volatility, fund initiators enjoyed a golden age of fund inflows before the entire fund sector was rudely reformed in 2012 in the midst of the financial crisis.

A recent note from Berlin-based rating agency Scope points to the weakness across all closed-end funds in 2016, with little prospect of much improvement in 2017. Real estate funds made up 70% of all funds, with office representing the favoured category.

Scope says that in 2016 a total of 24 closed-end public funds with planned equity volume of €1.94bn were licensed by financial watchdog BaFin, in comparison to 31 funds with prospective equity capital of €1.03bn in 2015. By contrast, in 2012 before the new regulations came into force in 2013, funds with €4.2bn in equity were launched.

Scope attributes the stagnation in the sector to negative perceptions of the product in classical sales channels, along with increased competition among investors leading to lower yields.  A separate study by WealthCap among 100 investors over a five-year period (2012-2016) on the German and American markets confirms the steady slide in investor expectations. If in 2012 a fifth of investors were looking for yields of 6% and more, most are now just looking for 5%.

Despite the higher regulatory hurdles, however, not all fund managers are pulling back from the market, as Scope point out. WealthCap itself launched two funds last year with planned equity capital of €217m. Patrizia Grundinvest launched three funds with equity capital of €104m, US-specialist Jamestown came with a €234m new US fund, while Swiss Life Asset Managers – owner of Corpus Sireo, with its comprehensive range of healthcare funds - made a big splash at the end of the year in announcing an ambitious new fund programme.

Of the overall 24 licensed public funds launched last year, 17 are real estate funds, making up 71% of all funds. Other asset classes such as private equity, aircraft, shipping and other specialty funds are viewed as minority products. Scope expects only a slight increase for 2017 of new fund issues, and anticipates further falls in average fund volume.

The WealthCap study also highlights how, for many investors, the key criteria in the meantime are the quality of the asset and its location – with quantitative factors like dividend and yield being viewed as 'hygienic' extra benefits. Also becoming more significant is the number of tenants, with more than half of WealthCap's respondents expressing a preference for assets with multiple tenants, up from 25.6% last year. Only one in ten prefers a single-tenant asset, a big change from 2012 when 40% wanted only a single tenant.