German fund inflows plummet by more than half in 1H 2023

Inflows into real estate funds plummeted by more than 60% in first half of the year as investors hold back from investing due to the slump in construction orders and the insolvency of project developers, according to consultancy Barkow Consulting.

‘It’s the lowest inflows in a first half since 2011, and back then there was no notice period,’ said Peter Barkow, founder and chief executive of Barkow Consulting.

According to the BVI, net inflows into special funds were just under €3.7 billion in the first half of 2023, compared with €6.4 billion in the prior-year period. Public real estate funds collected just €1.1 billion (H1 2022: €3.4 billion). In total, open-ended mutual and special funds managed assets of €309 billion at the end of June 2023.

The recent insolvency of the Nuremberg-based developer Project Immobilien has also sent shockwaves throughout the industry. The non-insolvent investment arm of the group collected the money for the construction projects by launching funds - a total of €1.4 billion, subscribed by more than 32,000 investors. Three of the four companies in the group are bankrupt. Most recently, the group had an investment volume of €3.2 billion under construction or in the planning stages.

‘One important reason for the insolvency is the enormous increase in construction costs as a result of the Ukraine war. It was not possible to pass on these cost increases to customers,’ said the statement of the insolvency administrators earlier this month. The Project Group focuses on the metropolitan areas of Berlin, Munich, Hamburg, the Rhine-Main region, the Rhineland and Nuremberg.

Of the current assets, the largest share - €159 billion - is attributable to open-ended special funds, and a further €132 billion to open-ended mutual funds. In the first half of 2023, however, inflows shrank significantly, amounting to €2.7 billion less for special funds and €2.3 billion less for mutual funds compared with the same period a year earlier. The composition of the portfolios differs in terms of the types of property use in which the two groups invest. While mutual funds draw 55% of their target rental income from offices and medical practices, special funds draw only 33%. They diversify more broadly into retail properties (25%), logistics (11%) and apartments (16%). In the case of mutual funds, retail (22%) and hotel (8%) also dominate alongside offices. According to the BVI, residential buildings only account for 4%.

The net inflow of open-ended funds has declined since 2019, but even in the current year, inflows exceed outflows by €1.2 billion as of June 30. More broadly, in the first six months of 2023, Germany's fund industry experienced a net inflow of €38 billion. Retail funds led the charge, according to the BVI, with net sales jumping from €8.3 billion to €10.9 billion. However, institutional investors showed restraint, especially in Spezialfonds, which drew €18.5 billion, down massively from €47.1 billion in the first half of last year.

UBS Euroinvest on the hunt for resi and logistics assets

That’s not to say that all fund managers are sitting the current crisis out. Open-ended real estate fund UBS Euroinvest is trying to move away from its 85% office ratio to acquire residential and logistics assets to the tune of around €100 million, according to its fund manager Alexander Isak.

The target for the distribution of asset classes in the fund is 20% each for residential and logistics; a similarly large share could also be taken by food markets, depending on investment opportunities. In addition to the Benelux countries, the focus is on the German market. The German share of the portfolio is to be expanded from zero to 20%. To this end, the fund has completed the purchase of a logistics property in Bensheim, Hesse, and also notarized a 70 unit residential complex in Cologne. With these two deals, Germany now accounts for around 6% of the fund's assets.

With around 70%, real estate funds still account for the lion's share of trading turnover on the secondary market of fund exchange  Deutschland Beteiligungsmakler AG but the average price has fallen to a new annual low. In June, there were a total of 391 transactions, down from 410 in May. At €18.71 million, nominal sales were virtually unchanged from the previous month. The average selling rate rose from 59.73% in May to 64.74% in June.

Spezialfonds dominate industry

By assets, Spezialfonds dominate at €2,015 billion, succeeded by open-ended retail funds at €1,334 billion. As of mid-2023, the fund industry in Germany managed an impressive €4,001 billion for both private and institutional investors, marking a 5% increase from the beginning of the year.

When interest rates were low, real estate investment funds soared in popularity because they generated a considerable return. Special funds for institutional investors, for example, increased the net value of invested assets almost fourfold to €176 billion between 2012 and the end of June 2022, according to Barkow, who referenced data from the Bundesbank. Public funds, in which anyone with sufficient financial means can participate, grew by 58% to €132 billion in the same period.

Equity funds were at the forefront of open-ended retail funds, attracting €9.4 billion. Actively managed funds contributed €5.3 billion, while ETFs brought in €4.1 billion. Money market funds followed suit, albeit with fluctuations, drawing roughly €5 billion in the second quarter after nearly €2 billion in outflows in the first quarter. Bond funds focused on corporate bonds recorded a solid €2.7 billion out of the total €2.9 billion inflow this year.

However, as REFIRE highlighted last month, Scope has downgraded five heavyweight German funds: Grundbesitz Fokus Deutschland from DWS Grundbesitz, Hausinvest from Commerz Real, Leading Cities Invest from KanAm, UBS (D) Euroinvest Immobilien and UniImmo Europa from Union Investment. The downgrades were caused by both increased risk parameters and weaker yield developments, according to Scope.

After years of burgeoning real estate prices, the turnaround in interest rates is causing particular problems. This means that funds can now invest their liquidity, their surplus funds, at better interest rates. To some extent, inflation-indexed rents for some buildings are rising in line with inflation, which improves the income situation. However, nobody wants to chalk up losses - sellers are not willing to accept the discounts on price, which would be the prerequisite for buyers to go through with a purchase. There are also huge differences depending on the segment: in the residential sector, the risks are not as high and logistics properties likely have the correction behind them. And, in retail, a lot depends on how exposed a store is to competition from online retailers. In this sense, the non-food sector is riskier than local food stores.