REAX highlights lively secondary market, but performance worries abound

The latest REAX Trend Barometer by Hamburg-based Real Exchange AG (REAX) highlights the lack of transparency and orientation on the German secondary market for institutional real estate funds (the so-called Zweitmarkt). The purpose of the quarterly survey of around 800 institutional investors, fund managers and fund initiators is to improve transparency in the sector.

The secondary market for shares in closed-ended real estate special funds is, on the whole, flourishing, with purchasers expecting quicker returns compared to new issues. Shares are sold for a variety of reasons, including the optimisation of an investment portfolio, but it can also be down to unsatisfactory fund performance.

The trend barometer shows that there has been a sharp increase in investor interest in purchasing shares in real estate funds over the last quarter. Conversely, the interest in selling or handing back shares to the investment management company has remained at the same level. 17% of respondents are planning to trade in shares over the next 12 months and a further 31% are considering it.

In the Q1 2021 survey, almost two thirds (64%) of market players expected an increase in transaction activity on the secondary market over the next 12 months and the current trend barometer shows that just under half (46%) now share this view. Around half (51%) expect market activity to remain stable.

What are buyers looking for? On the purchaser side, around 44% of participants said one of the main reasons to invest in the secondary market is the promise of quicker returns compared to new issues (up from 35% in the first quarter survey). Around 41% said a main reason is improved yields and more favourable purchase prices compared to new issues (down from almost 73% in Q1) and a similar percentage quoted quicker capital calls and the avoidance of blind pool risk as a reason to invest.

41% of market players said a major motivation to invest in the secondary market is the optimisation of their portfolio or portfolio restructuring and diversification or to increase their exposure to shares in property/real estate funds (down from just under 50% in the first quarter survey). The respondents were allowed their Top 3 choices from a prepared list.

What about the sellers? The reasons for the possible sale of shares in real estate funds for most institutional investors are many and varied. 83% stated their main reason to sell is the optimisation of their portfolio or portfolio restructuring or the reduction of their exposure to real estate funds (up 10 percentage points from 73% in first quarter).

Another important reason for a sale is the investors’ dissatisfaction with fund performance or fund management. This view was shared by around 47% of respondents (12% down from the previous survey with around 59%).

The third most important reason (at around 30%) is disagreement between the investors relating to the future direction of the fund and 25% of investors said that profit-taking, stop loss strategies and improving liquidity were principal motives for the sale of shares in real estate special funds. Regulatory requirements and ESG criteria still play a subordinated role in terms of sale, which according to REAX has not changed since the first quarter survey.

REAX board member Heiko Böhnke sums up the latest survey: “Although many investors have already recognised the potential offered by the secondary market, institutions still have a huge requirement for more information, for example in terms of functioning and trading parameters relating to the secondary markets, the advantages and disadvantages compared to handing back shares to the investment manager and also issues relating to valuation and accounting.”

Böhnke concludes that increased market transparency would improve the degree of acceptance of the secondary market and the opportunities it offers. The company expects an annual transaction volume of €2.5 – €4.0 billion on the secondary market for real estate special funds in the period up to 2025.