Investment management company HPR Capital Management has issued a closed-ended special AIF for semi-professional and professional investors, the first fund of its kind in Germany to invest in equity release properties.
The fund, Portfolio Grund & Boden Invest 2019, will invest around €50m across 150 or so residential properties with a market value of more than €80m over a fund lifespan of 15 years. The minimum ticket size is €200,000 and the fund is aiming for an annual yield of around 4% based on a conservative value growth estimate of 2% and operating costs of around 0.7% p.a. An upside scenario assumes value growth of up to 6% per year and produces a yield of up to 12.5%. The initial profit distribution is planned for four years after issue and the fund obtained its BaFin permit at year-end 2019.
The fund will invest in undervalued existing residential stock in sustainable top locations across Germany. The purchase price is estimated using the market value minus the hypothetical rent (value of the life interest) for a defined period. For example, in the case of a 70 year old owner, the purchase price minus the value of the life interest would be around 60% of the market valuation. As such, the seller remains the beneficial owner of the property until his or her death.
‘Purchase prices for residential properties in Germany have risen by almost 50% over the last 10 years, and condominium apartments have almost doubled in price since 2010,’ Michael Rau, managing director of HPR, told REFIRE. ‘We buy off-market real estate from people who, initially, might not want to sell. We have around €30m of potential acquisitions in the pipeline. We’re mainly looking at the Big 7. The reasons why people sell vary; around 10% need the money but the remaining 90% want to keep their standard of living. Their children are already in their 50s, so they don’t need the money.’
HPR Capital Management will call on a network of established equity release providers, including an initial co-operation with the company HausplusRente GmbH.
‘This trend will continue, which means that residential properties remain an attractive investment,’ said Rau. ‘However, skyrocketing prices are making it difficult to find suitable products offering attractive yields. The seller can use the capital tied up in the property and is also able to remain in his own home. Our investors can purchase an attractive property as part of an off-market transaction at below market value.’
And as more and more pensioners struggle across Europe, the demand for equity release is expected to increase, according to Steve Kyle, secretary general of the European Pensions and Property Asset Release Group (EPPARG), a Brussels-based organisation representing the interests of European home equity release service providers at the European Union level.
‘We have observed over a number of years that the number of social demands on the elderly is increasing across Europe,’ he said. ‘Even in Germany, the level of home ownership is becoming quite high and it’s a very large market. Equity release is about, aspirationally, having a better life. There are several trillions of euros in property assets held in Europe by people aged 55 or above. That puts the penetration rate at less than 1%. We’re just at the beginning of something very exciting.’
EPPARG aims to encourage the safe development of equity release as a solution to the pension gap and to work towards a recognised quality label or kitemark across Europe. Countries with EPPARG representatives or associates make up over 60% of all the countries in Europe with a home equity release market. EPPARG is in the process of introducing pan-European principles and standards, according to Kyle.
However, would-be customers need professional help to ensure they understand what equity release entails, Kyle warned. ‘Typically, customers are looking at compound interest on the loans, which can range from 2.5% to 7% per annum. However, some newer products allow customers to pay some of the interest off each year. As the market grows, it will become more innovative.’
Deutsche Leibrenten Grundbesitz expands its presence nationwide
Given Germany’s ever-increasing elderly population, it’s easy to see why property and pensions are coming together. Last month, German property pension scheme group, Deutsche Leibrenten Grundbesitz, expanded its presence nationwide following a strong 2019. The Frankfurt-based group offers homeowners throughout Germany aged 70 or above a variety of property pension arrangements, including monthly pension payments, a one-off payment, and a combination of both. It now plans to open additional offices in major German cities. During 2019, it achieved record amounts of new business transactions and procured volumes with 210 units and €75m, respectively, corresponding to growth in excess of 100% y-o-y. Deutsche Leibrenten also issued a €50m convertible bond in November 2019
‘Deutsche Leibrenten has been active in equity property release for the last four years – it’s our entire business,’ Friedrich Thiele, CEO of Deutsche Leibrenten, told REFIRE. ‘We are offering a nationwide product. This year, we want to do around €100m of new business. The percentage of people owning their own home in Germany - and ageing - is growing all the time, so this segment of the market can only grow going forward.’
Thiele estimates that between 150,000 and 200,000 people in Germany each year could potentially be interested in releasing the equity in their homes in this way. ‘The biggest challenge we face is to make equity release popular and to establish sustainable market standards in the German market. With some five million property owners over the age of 65 in Germany, and a continuously ageing population, the market for responsible property pension schemes is very large,’ Thiele said.
However, it is important for equity release schemes to be sold properly, according to Kyle. ‘We have a lot of support from governments because equity release is putting a housing market asset to work. It’s good for the economy and it’s good socially but we want standards across Europe so that this product is sold well.’
