rawf8/Envato
The Nuremberg-Fürth Regional Court has delivered a significant blow to Union Investment's open-ended real estate fund, Uni Immo Wohnen ZBI, ruling that the fund can no longer be marketed as 'low risk'. The decision follows a lawsuit by the Baden-Württemberg Consumer Centre, which argued that the fund's classification as risk level two on the PRIIPs scale was misleading. Union Investment plans to appeal the ruling, but the verdict has already sent ripples through the real estate investment community.
The court's judgment challenges the way risk was communicated to investors, potentially exposing Union Investment to legal claims from those who believed they were buying a low-risk product. The decision also raises broader questions about the risk assessment practices of other open-ended real estate funds in Germany.
Launched in 2017, Uni Immo Wohnen ZBI was marketed as a conservative, low-risk investment vehicle. Targeting private investors through the German Volksbanken and Raiffeisenbanken network, the fund focused on residential properties across Germany, promising stable returns in a low-interest-rate environment. At its peak, the fund managed assets of around €4.6 billion, including about 1,000 properties spread across metropolitan areas such as Berlin, Hamburg, and Munich.
The fund's strategy relied heavily on the appreciation of property values and rental income growth. However, rising interest rates and soaring inflation since 2022 have undermined this model. In June 2024, the fund’s management announced a shocking 17% writedown, slashing the redemption price from €50.74 to €42.26 per unit, wiping out €800 million in a single day. Investors were caught off guard, having been led to believe the fund was a low-risk, steady performer.
Risk assessment under fire
The court's ruling challenges the key information document (KID) that rated Uni Immo Wohnen ZBI as risk level two out of seven, implying low volatility and limited downside risk. Consumer advocates argued that this classification grossly underestimated the fund's exposure to market fluctuations. They claim the risk rating should have been at least six, reflecting a higher investment risk.
One of the central criticisms is the frequency of property valuations. Under PRIIPs (Packaged Retail and Insurance-Based Investment Products) regulations, low-risk funds must reassess property values at least monthly if no suitable benchmark is available. However, Uni Immo Wohnen ZBI conducted valuations only quarterly. Union Investment argued that liquidity parked in money market funds, which are priced daily, justified the low-risk rating. The court disagreed, stating that daily pricing of liquidity reserves did not compensate for the infrequent property valuations.
Legal experts believe this ruling could have wide-reaching implications for other open-ended real estate funds with similar valuation practices. “This is a wake-up call for the entire industry. It exposes the risk of using outdated valuation methods to justify low-risk classifications,” said a lawyer specializing in investment fund litigation at the prominent consumer rights law firm Dr. Stoll & Sauer.
According to Christopher Kress, partner and specialist lawyer for banking and capital market law at the law firm AKH-H, "Our clients were systematically recommended open-ended real estate funds by banks as absolutely safe investments. The Nuremberg-Fürth District Court has now confirmed our view that this risk classification is wrong. Open-ended real estate funds are not risk-free investment products. The judgment of the Nuremberg-Fürth District Court has enormous implications, as numerous fund providers are affected by the core statements.”
Decision could trigger "an avalanche of claims"
Fund expert Stefan Loipfinger of Investmentcheck.de, an outspoken critic of fund labelling in the German funds industry, said the ruling risked triggering an avalanche of claims against the country's open-ended real estate funds. "At the end of the day, it's about systematic misadvice that could justify the penalty of damages. The correct but formal approach of the consumer centres could trigger an avalanche... Open-ended real estate funds carry risks that should not be underestimated, as we have already experienced in the past with liquidations involving losses of over 50%", he said on his website.
The fund's property portfolio, valued at over €4 billion before the writedown, comprises predominantly residential assets. However, questions have been raised about the quality and location of these properties. While marketed as high-quality residential investments, a significant portion of the assets are in secondary locations or involve older buildings requiring substantial maintenance.
Analysts suggest that these factors contributed to the abrupt valuation correction in June 2024. “The market was already cooling due to interest rate hikes, but the scale of the writedown indicates that some of the properties were likely overvalued in the first place," one analyst told REFIRE.
Investor reactions and industry impact
The ruling has significant implications not only for Union Investment but for the broader industry. If the appeal is unsuccessful, it could trigger a wave of legal claims from investors who feel misled by the fund’s risk classification. The case also puts a spotlight on the valuation practices of other open-ended real estate funds, many of which rely on quarterly valuations despite the volatile market environment.
The judgment raises questions about the transparency and reliability of risk assessments within the industry. Legal experts warn that fund managers may need to adopt more rigorous valuation practices to justify their risk classifications, potentially leading to increased compliance costs and more conservative investment strategies.
Consumer rights law firm Dr. Stoll & Sauer commented, “This ruling has the potential to redefine risk communication standards for the entire open-ended real estate fund sector. Fund managers will have to be far more transparent about how they assess risk, especially in volatile markets.”
Looking ahead, this case could serve as a catalyst for regulatory scrutiny, leading to more stringent rules on risk classification and valuation practices. For investors, the ruling is a stark reminder to scrutinize risk assessments carefully, even for funds marketed as conservative or low-risk.
Union Investment itself remains defiant, announcing its plans to appeal the ruling and maintaining that its valuation methods comply with all legal requirements. “We are convinced that we have classified the risk of Uni Immo Wohnen ZBI in accordance with the PRIIPs Regulation and the supervisory authority’s guidelines,” a spokesperson said.
The outcome of the appeal will be closely watched, not only by Union Investment and its investors but by the broader €110bn open-ended real estate fund market, which may soon face intensified regulatory oversight.