Record inflows into German open-ended funds as yield spreads widen

Germany’s open-ended retail real estate funds saw record inflows in 2019 as the gap widened on the spreads between government bond yields and returns from the property market, as new data published by Berlin-based rating agency Scope shows.

As a comparison, the average yield on 14 open-ended mutual real estate funds over the past 15 years has always shown a positive differential, or premium, over German government bonds, with this spread, or “excess return” only widening since 2013. Net inflows in 2019 were only exceeded in 2009 and 2016.

As Frank Netscher, analyst at Scope, puts it: “The 3.8 percentage-point spread between yields on open-ended real estate funds and German government bonds has very rarely been so wide. “On the one hand, yields on government bonds have fallen steadily, with the yield on 10-year German bonds in negative territory for much of 2019. On the other hand, yields on open-ended real estate funds have also risen steadily, driven primarily by increases in the value of properties in fund managers’ portfolios.”

“Funds data show that inflows are tightly correlated with the extent of the premium of open-ended real estate funds over government bond yields,” said Netscher. Inflows would arguably have been even higher had not several funds limited or suspended their acceptance of new investors. And although Scope isn’t expecting interest rates to rise in the short term, it’s also not expecting much more price appreciation of existing properties in the funds, where it views particularly newly-acquired properties as having been bought at high prices, with correspondingly low yields. (ssk)