Life cycle planning more critical, as fund holdings age

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We reported last month in REFIRE how Germany’s open-ended mutual real estate funds surpassed the €100bn mark at the end of Q1 for the first time. A new study by Berlin-based rating agency Scope shows, however, that with the difficulty of finding suitable new assets to buy, the age structure of many of the funds’ portfolios is shifting dangerously.

Fresh funds of more than €5bn flowed into the open-ended funds in the first half of this year, considerably more than in the same period last year, said Sonja Knorr, head of real estate analysis at Scope. The market at the moment is a seller’s market, with demand heavily outweighing supply. Despite yields falling to record lows, demand for properties remains so high that Scope says managers will have to pay ever-closer attention to the risks inherent in their fund structures.

Scope scrutinized portfolios from 15 commercial property funds from the more than €90bn invested in the sector at end-2018, and concluded that the assets were getting ever bigger – and older.

Knorr points out that for higher volume single assets, the competition to buy such assets is inevitably narrower. Hence for assets costing €200m upwards, the competition is often other open-ended funds. It’s relatively easy to buy, but when it comes to selling, it may be more difficult to find a buyer, she warns.

Over the last five year, the Scope researchers found, the average age of property in the open-ended funds rose from 12 to 14 years. The share of assets aged between 15 and 20 years old doubled from 11% to 22%, while the share of assets aged 10 years old or less fell from 45 to 28% - all largely because of the shortage of available assets to buy. This all makes cleaning up portfolios more difficult, with longer lead times for buying, and exiting, positions.

On the positive side, many funds are now investing more in project developments and refurbishments, which will have a positive effect on the age structure of funds. With many funds holding mixtures of office, shopping centres and retail parks, all of which are experiencing considerable pressure for change, not least due to e-commerce, life cycle planning for property holdings is becoming ever more important, concludes Scope.