EXPO REAL: German Spezialfonds to grow to €50bn industry

German Spezialfonds are set to balloon into a €50 billion industry sector, according to global property services firm CBRE.

The firm said at EXPO REAL that significant growth in the long standing property vehicle that offers tax exemption as well as regulation and can be closed ended, will transform the sector over the next three to five years.

In a report on the issue, CBRE said the last four years had seen a remarkable “shift of balance” in the German unlisted real estate industry. With German open-ended funds (GOEFs) falling out of favour among investors partly due to new restrictions on their ability to redeem capital, many are looking for new ways to invest into real estate – with Spezialfonds leading the list of options. In addition, the sector will be boosted by a further increase in allocations towards real estate from institutional capital.

The firm did say that a possible alternative might have been listed property companies or REITs However, the German listed real estate market is still at an early stage in its development, pointed out CBRE, with a low total market capitalisation. In any event, for many institutions such investments would fall under their equities allocations, rather than being considered as real estate..

Statistics by the ‘Bundesverband Investment und Asset Management’ (BVI), which represents the German mutual fund and asset management industry, underlines recent strong acquisition activity among Spezialfonds, with €4.64 billion invested in Europe in the second half of 2011, which is some €400 million more than GOEFs. This is almost at the same level as the €5 billion of Asian investment in Europe over the same period. This result is even more significant when one considers the sector size of only €35 billion at the moment, argued CBRE.

Iryna Pylypchuk, associate director, EMEA research, said: “The recent growth in Spezialfonds, combined with a further increase in allocations towards real estate from institutional capital, will make the Spezialfonds sector a €50 billion industry in the next three to five years. This is further good news for the German real estate market, as it is set to benefit from this increase in local investor demand, arguably more broadly based across markets and locations than is often the case with international capital.”

Spezialfonds are not just being used by German institutions to access German property, although that is their purpose in the vast majority of them. In some cases, they are being used as vehicles to invest overseas.

For example, MGPA, the private equity real estate firm, has raised €85 million exclusively from German institutional investors for a core-plus Asian real estate fund. The company held a first close last month for MGPA Asien Spezialfonds, with three German-speaking investors committing to the vehicle for which the firm has an overall target of €500 million.

Jan Linsin, senior director and head of research in Germany for CBRE, said:  “In fact there are a number of funds targeting international markets. However, the majority of activity will remain biased towards their home market, certainly in the near term.”

There is a potential spoiler for the industry, however. The German government has issued proposals to halt the launch of new open-ended funds including Spezialfonds. Yet CBRE  was doubtful such proposals would lead to a ban.

“Considering the market and industry reaction, the likelihood is that Spezialfonds will be exempted from these proposals, especially in light of its success and suitability for institutional investors,” the company said.

Over the summer there were numerous new Spezialfond launches from both existing and newly set up KAG structures, as well as at least a dozen new acquisitions, predominantly targeting the German market. This is closely linked with what is typical of Spezialfonds structure – smaller vehicle size, as well as greater sector and geographical focus – and this closely aligns with investing in their home market.