Rating agency Scope warns on higher risk-taking by German funds

Germany's open-ended real estate funds sector took in more than €5bn in new investors' capital in 2015, up from €2.8bn in 2014, according to figures released by Berlin-based fund rating agency Scope.

After several tough years in the sector, which saw many of the German open-ended funds go into liquidation, Scope expects last year's upward trend to be maintained through 2016, as investors from North America and Asia also commit resources to the sector. Liquid real estate vehicles are seen as an attractive inflation hedge, and still provide better returns than relatively risk-free bonds, offering a current average total yield of 2.4%, which funds association BVI estimates as the current return.

According to Sonja Knorr, director at Scope Ratings, “We do expect to see inflows amounting to billions throughout the year, and it is entirely possible that some funds will once again reach their inflow limits this year.”

Despite many of the liquidated funds still in the process of returning funds to investors, which might be expected to dampen enthusiasm and inflows into the sector, Scope sees the apparent demand as still outweighing supply – underpinned by the fact that most assets being sold from liquidating funds are quickly finding new buyers across all risk categories. Frau Knorr says, "Certain sectors of the market are already close to overheating. The chances of increasing returns from further capital appreciation are therefore increasingly slim."

Scope note that, with less and less true 'core' assets available, open-ended funds are taking increasingly higher risks, moving into project developments, refurbishments or gambling on reducing vacancy levels, although not yet taking risks on the quality and desirability of the location itself. Not all funds are exposing themselves to these risks – with certain funds operated by the biggest fund managers such as Union Investment and Deka having in-built limits on the amount they can take in to ensure it can be sensibly invested.

Knorr added, “Many funds are already shifting their focus onto riskier investments than before. So if the economy heads into a downturn, occupancy rates and fund returns could also come under pressure.”