By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Open-ended AIFs buck investment trend
Open ended real estate special AIFs have grown faster in the first eight months of the year than in the same period last year, according to INTREAL and the Bundesbank.
Net AUM increased from €156.2 billion in January 2022 to €169.4 billion by August, an increase of 8.4%. So far, this year has also outperformed 2021 in terms of the net cash inflow for such funds. During the first eight months, the funds benefitted from €10.2 billion of inflows, compared to €7.6 billion during the same period last year.
‘Due to the consequences of the war and the rapid rise in interest rates, the real estate market in general is defined by serious unease,’ said Michael Schneider, managing director at INTREAL. ‘Many institutional investors have adopted a wait-and-see attitude, and are reviewing their current and future asset allocation in light of the ongoing developments. As a result, investment decisions are often postponed.’
Equity-rich funds already seizing opportunities
The figures released by Germany’s central bank are somewhat surprising and seem to contradict general negative market sentiment. However, to some extent, the growth is attributable to existing commitments, not to mention that some investment funds have enough equity to act on emerging opportunities. The figures also show that new funds are being launched and that fundraising efforts continue. ‘These trends are confirmed by what we see in our day-to-day business,’ Schneider said. ‘We managed to increase our assets under administration by a total of €7.3 billion during the first eight months of 2022. Our outlook is defined by cautious optimism. We assume that the market will keep growing in 2023, although it may do so at a slower pace than what we have seen so far. I am convinced that once the prevailing parameters get better safety ratings - the keywords here being volatile capital markets and high inflation rates - institutional investors will drop their reticent attitude again, especially in regard to real estate fund investments.’
That’s not to say that the open-ended fund segment is entirely rosy. Over the summer, Scope updated the ratings of 17 open-ended real estate funds. Two funds were upgraded, six were downgraded and the ratings of nine funds remained unchanged. Once again, there were more downgrades than upgrades, reflecting the pattern set in 2020 and 2021. ‘This shows that investors have to live with lower risk-adjusted returns than a few years ago,’ said Sonja Knorr, head of Alternative Investments at Scope Fund Analysis. ‘Overall, however, open-ended real estate funds continue to have a good risk-return profile on average. The rating spectrum currently ranges from a+AIF to bb-AIF.’
Funds focusing on commercial real estate showed an average return of 2.2% in 2021, with returns ranging from 0.4% to 3.7%, according to Scope. Residential real estate funds performed better, generating returns of 4.7%. As of 31 May 2022, the one-year return for commercial property funds increased by 0.2% to 2.4%, compared to 3.9% for residential property funds. This year, Scope is forecasting an average return of between 2.5% and 3% for commercial real estate funds.
Offices remain top dog
Office properties remain at the top of fund managers' wish lists, according to the market survey of 26 asset managers conducted by Scope. Three quarters of those surveyed intend to invest in offices in the next three years, followed by residential properties (67%), while 39% are planning to invest in the subsidised housing segment, and 33% in micro and student living.
The scepticism towards shopping centres and hotels is also reflected in the funds' transactions. Last year, less money was invested in retail properties than in previous years and hardly any flowed into hotels in 2021. The situation was markedly different for residential and logistics properties, with both asset classes accounting for around 11% each of total investments last year. Office properties, traditionally the strongest segment, continued to dominate in 2021, accounting for 70% of capital invested. Logistics have lost their mojo, with just 33% of respondents interested in logistics investments this year, down from 63% last year, largely due to significantly higher prices for logistics properties.
Funds eyeing digital/crypto assets
Going forward, less traditional asset classes could be on funds’ radar. According to a recent study by Nickel Digital Asset Management, 30% of pension funds, wealth managers and other institutional investors believe that more than half of German spezialfonds will allocate to cypto/digital assets within the next two years.
Last year, Germany introduced the Fund Location Act, which allows specific funds, including spezialfonds - open-ended domestic special AIFs with fixed investment terms - to allocate up to 20% of their assets under management to crypto/digital assets.
‘Germany has been moving swiftly to legitimise digital assets, and the passing of the Funds Location Act last year is just one example of this,’ said Nickel Digital’s managing director of institutional sales, Fiona King. ‘Germany has taken a global lead in embracing the new asset class. Our research shows professional investors expect spezialfonds to capitalise on the Fund Location Act and start allocating to digital and crypto assets. This will provide a further strong endorsement for digital and crypto assets and lead to more professional investors allocating to this new asset class for the first time or increasing their existing exposure.’
Nickel Digital’s survey also found that over the long-term, 78% of the survey respondents expect the spezialfonds to allocate over $100 billion to crypto and digital assets, or at least 5% of their of their combined assets, which are around $2 trillion.
The survey of 200 professional investors from across seven countries including Germany, who collectively manage around $329 billion in assets, showed that 30% believe between 25% and 50% of spezialfonds will allocate to digital and crypto assets between now and 2024.
