Composite: Depositphotos.com / REFIRE
Industry veteran Claudia Reich Floyd of Hazelview Investments cuts to the heart of the matter: German open-ended real estate funds have long thrived on the illusion of stability, but once cracks appear, they can trigger a “spiral of value erosion”. She argues that it is not the fluctuations in property prices that are the core problem, but the structure itself – a structure that lacks transparent trading and, once shaken, can quickly see investor confidence collapse. As Reich Floyd puts it, “We therefore need to question both the myth of open-ended real estate funds and our fear of volatility.”
Sebastian Lohmer, an experienced fund manager and consultant, lays bare the systemic difficulties at play. Expert valuations lag behind market realities, creating a dissonance that has left investors increasingly wary. “Experts are prohibited from making forward-looking revaluations or write-downs, which often leads to discrepancies in phases of extreme market movements,” Lohmer notes. Add to this a management fee model that has long resisted tying itself to performance, and it is easy to see why open-ended funds find themselves unable to offer a credible contingency plan.
More worryingly, Lohmer points to the risk classification conundrum: while calm times see the funds comfortably in risk class 2, volatility can instantly push them into class 6 territory – with direct consequences for banks selling these products. If customers, as expected, continue to indicate a preference for low risk, these funds may soon be off the table for many bank advisors entirely. The outcome, Lohmer warns, is that “a higher risk classification also justifiably raises investors’ return expectations... the returns on real estate funds become unattractive when adjusted for risk.”
Court rulings causing deep worry among investors
This risk reclassification is no longer a theoretical concern. A ruling by the Nuremberg-Fürth Regional Court has determined that funds valuing properties only quarterly cannot claim to be low-risk investments – instead, they must be slotted into risk class 6, equating them with highly speculative assets. The ruling, while under appeal, has unsettled fund managers and opened the door to a fresh wave of investor lawsuits. “Given the significance of the Nuremberg ruling, capital management companies should have been quietly working on a Plan B,” writes Immobilien Zeitung. But the reality is less reassuring: few firms are prepared to comment on their strategies, and most appear to be hoping that the Higher Regional Court or even the Federal Court of Justice will eventually overturn the decision.
Meanwhile, the ruling by the Stuttgart Regional Court, ordering the refund of an investor’s entire stake in the Uni Immo Wohnen ZBI fund, underscores the sector’s vulnerability. Though the case hinged on misadvice rather than the broader risk classification, it has added fuel to investor nervousness. The court found that the bank had inappropriately recommended the fund as part of a low-risk strategy, equating it with fixed-term deposits despite its fundamentally different risk profile. In the view of the court, the fund’s volatility and the possibility of forced sales or adverse portfolio decisions made it an unsuitable match for the client’s cautious investment objective.
The judges emphasised that the specific risk class assigned to the fund was not the issue. Rather, it was the fact that any open-ended real estate fund carries inherent risks that cannot be compared to the safety of fixed-term deposits, which benefit from deposit protection. Markus Gotzi, writing in Der Fondsbrief, suggests that lawyers could unleash a “wave that has the potential to become a tsunami,” given the extent to which low-risk categorisations are built into the marketing of these funds. Indeed, while banks and fund managers continue to defend their long-standing practices, the Stuttgart case has made it clear that courts are willing to scrutinise how these products are sold to retail investors – and whether they genuinely fit the risk appetite of those who buy them.
March redemptions at highest for over eight years
Outflows tell a stark story. Bundesbank data shows that since August 2023, around €8.7 billion has left open-ended funds, with March 2025 alone seeing redemptions of over €1 billion – the highest monthly outflow since 2017. “The hoped-for recovery did not materialise in March. We can only hope that it will come before things get difficult again in the middle of the year,” warns Peter Barkow of Barkow Consulting. He points to a spike in online searches for “real estate funds” as a harbinger of more redemptions to come, with the sector’s €125 billion total assets at risk of further erosion.
So far, the fund managers’ fallback strategies are thin on detail. Immobilen Zeitung’s survey of leading fund providers found few with any real alternative to risk class 6. Union Investment, ZBI, and Catella maintain that the Nuremberg ruling is incorrect and expect it to be overturned. Commerz Real promises to monitor developments closely, while DWS insists it sees no reason to reclassify. Only Quadoro has amended its prospectus to flag an upgrade to risk class 6, should the courts rule against them.
Technically, there may be an escape route through replication models like the one developed by Boris Wälchli at AAAccell, which uses market data to replicate real property price movements and calculate risk more realistically. But most fund houses have shown little appetite for engaging with these alternatives. Ralf Werner, a professor at the University of Augsburg, confirms that replication is compatible with the regulatory framework, yet progress is glacial.
For now, the sector remains stuck in a limbo of legal uncertainty and outflows. As Reich Floyd notes, the German open-ended real estate funds industry has long sustained itself on the comforting myth of low volatility. But absent a credible alternative and weighed down by the courtroom battles ahead, these illusions are wearing thin. In a world that no longer tolerates polite fictions, the funds may soon find themselves judged not just by the courts – but by investors who have finally decided to vote with their feet.