Composite: Goesta Ritschewald, REFIRE
In for a penny, in for a pound? If an institutional investor wants to exit a real estate fund, this usually runs counter to the interests of the asset managers. Some of them try to keep investors on board by means of standstill agreements. But this is not always the best course of action.
Goesta Ritschewald has been active in the institutional real estate market for many years and has helped to set up numerous special funds. In his regular exchanges with institutional investors, he has recently been hearing more and more often that many are bound by standstill agreements – coupled with growing dissatisfaction. Instead of playing for time, he advocates other ways of taking greater account of investor interests and better addressing the challenges facing the real estate markets. In our ongoing series of articles on Germany’s secondary markets, we’re grateful to Markus Gotzi, editor of Der Fondsbrief, for the following exchange:
Der Fondsbrief: Standstill agreements between asset managers and their investors are common in falling markets. How do you justify your criticism of them?
Goesta Ritschewald: Standstill agreements can be useful in exceptional cases – for example, when they create short-term time for reorientation and strategy adjustments in an extreme market phase. But beyond that, they do not offer a real solution. Often, they simply mean waiting instead of actively responding to changing market conditions or the lifecycle of a real estate portfolio.
This has significant disadvantages for investors: declining liquidity, lack of flexibility and potential loss of value. In addition, standstill agreements prevent the risk profiles in investors' portfolios from being adjusted. On the fund management side, there is a risk that the risk associated with such agreements will be underestimated – namely, the dwindling trust of investors in the ability and willingness to act in their interests.
FB: How widespread are standstill agreements at present?
Ritschewald: Many investors report that they were asked to enter into standstill agreements and agreed to do so for lack of alternatives. Some of these agreements will even be extended in the middle of next year. As an ad hoc measure and for a strictly limited period of time, such an agreement can be useful – but only if it is accompanied by a concrete action plan, such as a capex plan, asset realisation path, revitalisation or an exchange option.
FB: How are institutional investors reacting to the expiry of the agreements?
Ritschewald: Most likely with an increase in redemption requests. For investors, this usually means a loss of value, while for asset managers it means a loss of trust, damage to their reputation and a loss of assets under management (AuM).
FB: What do you suggest instead?
Ritschewald: In Germany, an approach is beginning to develop that has long been established internationally and enables fund managers to act actively and in the interests of investors. Proactive managers start exactly where standstill agreements fail: with the targeted exchange of individual or multiple investors willing to exit in order to develop individual properties or the entire portfolio into the next market or lifecycle phase.
FB: What do you see as the advantages?
Ritschewald: This opens up clear opportunities for fund managers: AuM remains unchanged – or even grows if existing investors are transferred to more suitable vehicles from the same fund manager. Investors retain confidence when they are actively offered the opportunity to switch to more suitable structures. Proactive action also has a direct impact on reputation: ‘We know what we are doing – we are not just waiting for better times.’ At the same time, the fund manager sends a signal to the market that strengthens existing investors and appeals to new investors who value active management.
FB: How does that work in practice?
Ritschewald: Internationally, the secondary market has developed into a tool for establishing more flexible fund management that is more closely aligned with investor interests. It creates orderly liquidity for investors wishing to exit and capital for ESG measures, capex and add-ons. It ensures a longer holding period for attractive assets, which improves the track record and performance of fund management. And, very importantly, the secondary market offers better alignment solutions for heterogeneous investor interests.
FB: Do fund managers see it the same way?
Ritschewald: In Germany, the secondary market is developing slowly and awareness among fund managers is growing. The strength of actively managed secondaries lies in their ability not only to stabilise funds, but also to develop them in a targeted manner. They open up the possibility of incorporating additional equity and debt resources while leveraging the special skills of external managers who have been active in the value-add segment for years. This is precisely where there is in-depth expertise in the revitalisation of properties, the implementation of ESG and energy efficiency measures, and the repositioning of properties for specific uses, whether office, residential, logistics or retail. Standstill agreements are therefore the opposite of investor-oriented fund management. Manager-driven secondaries, on the other hand, are an instrument that creates room for manoeuvre, focuses on investor interests and develops funds in a future-proof manner.
FB: Compared to the UK and the US, the secondary market in Germany still has potential for development.
Ritschewald: Over the past two decades, the global secondary market for shares in institutional real estate funds, or secondaries, has developed internationally from a niche market into an established market segment. The secondary market gained particular importance after the global financial crisis of 2008, as many investors made liquidity-driven sales and buyers speculated on significant discounts. In Germany, the primary market, which forms the basis for a functioning secondary market, is significantly smaller. Another reason is the lack of transparency. However, Fondsbörse Deutschland is leading the way here and has expanded its long-established trading platform for public funds to the institutional market.
FB: What makes up the largest part of the segment?
Ritschewald: The majority of the global secondary volume in the real estate sector is accounted for by closed-end funds and comparable illiquid vehicles, as this is where the natural demand for early exit opportunities is greatest. However, investments in renewable energies are also a possibility.
This article is part of our ongoing series about Germany's secondary markets. Read the other articles in this series here: Series on Germany's secondary market