Millions of Germans are deeply worried about their exposure to real estate. That's not because they overpaid for fancy homes. (It couldn't be: the majority still rent rather than own the properties they live in.) But a key pillar of their retirement planning has been shaken to the core by the crisis engulfing the country's €85 billion ($101 billion) open-ended property fund industry.
According to data published by the BVI, an industry association, more than €3 billion of capital was withdrawn from the sector in December alone, and market insiders believe that in January the trend continued unabated. Since then, the assets of three multi-billion dollar open-ended vehicles overseen by high-profile managers Deutsche Bank and KanAm have been frozen in a desperate attempt to stop investors from fleeing the sector en masse.
If the closings were intended to stabilize the market, the move does not appear to have paid off: consumer confidence in the sector remains at an all-time low, and managers of openended funds are having to deal with a host of problems, including poor performance, limited transparency, governance scandals and a widely criticized valuation methodology at odds with international standards, which has brought accusations that overpriced assets have been sold to investors for years.
It is a dramatic reversal of fortune for a longestablished investment product that has enjoyed tremendous popularity, especially in recent years. Following the demise of the technology boom in 2000, Germans turned their backs on equity instruments and switched into open-ended property funds. In 2002 and 2003 alone, the ensuing rush into real estate pumped nearly €30 billion of capital into the sector—significantly more than could be sensibly invested, as managers soon discovered.
It may not be a bad thing that €85 billion fund management industries typically don't just die overnight.
Looking for ever-larger acquisitions and struggling to find enough purchasable assets, some managers took to investing in new developments, at times with disastrous consequences. As the wall of money rose, performance deteriorated and investors began to withdraw. The subsequent outflows forced some of the managers to liquidate assets cheaply; in the case of Deutsche and KanAm, it triggered the decision to freeze funds altogether.
Whether the sector can recover is subject to intense debate. Skeptics take the problems as evidence that open-ended funds are fundamentally flawed: in good times they are prone to attracting excess capital; in bad times, given the absence of a regulated secondary market, a manager may find itself under so much pressure to give capital back that the viability of the entire fund comes under threat. Despite ongoing efforts to restore faith in the product, some practitioners believe its days to be numbered—especially if publicly listed real estate investment trusts (REITs) are introduced in Germany.
So it should not come as a shock that foreign investors are salivating at the prospect of successful bargain hunting. These include US and UK opportunity funds, which over the past year have already emerged as a major force in the German market.
Not only are foreign private equity buyers likely to be first in line to pick up cheap assets from open-ended sellers in distress, they also appear well positioned to acquire the high-quality real estate being sold off by German corporates and public institutions that are beginning to reduce their real estate holdings. Those close to the German market predict heavy deal flow over the coming months, and it looks as though the local players, having dominated the market in the past, simply won't be there to participate.
No wonder private equity firms are rubbing their hands. However, there is also the argument that opportunity funds should not wish for their competitors' permanent demise. By definition, successful private equity deals don't happen without exits. If the open-ended sector does not recover to absorb the assets that private equity firms will be looking to sell in a few years time, the exit route available to them will be no Autobahn. By that time, REITs could of course be ready to pick up the slack. But seeing that legislation has not yet been passed, such an outcome is no guarantee.
And so, from the perspective of private equity firms, it may not be a bad thing that €85 billion fund management industries typically don't just die overnight. There are those who believe there is plenty of life left in the open-ended model. And perhaps the country's retail investors are not alone in hoping that at some point, today's crisis will be over. Given their long-term objectives, private equity funds should hope so.
Stichting Pensioenfonds says ABP likely to reduce presence in Europe
Stichting Pensioenfonds ABP, the Dutch civil service scheme, has decided not to invest in Russian real estate but is currently pursuing deals in Mexico and Brazil, according to ABP senior portfolio manager Rob Bingen. Bingen explained ABP's global strategy at the PropInvest Europe conference in Barcelona in February. In answering a question from a delegate, Bingen reportedly revealed that ABP was likely to reduce its exposure to Europe in the future in favor of Asian, North American and South American holdings.
UK mid-market real estate M&A sees explosion in 2005
Over the past year, the volume and value of UK mid-market M&A in the real estate sector has increased significantly, according to the latest Thomson Financial statistics analyzed by Grant Thornton Corporate Finance. While the number of mid-market deals in the real estate sector has increased by 16 percent between 2004 and 2005, the value of such deals has skyrocketed by 45 percent. David Brooks, head of M&A at Grant Thornton, believes investors have been drawn to the sector by its robust revenue streams and consistent returns on investment. Brooks also attributes the rise to the hype surrounding the possible introduction of UK REITS.
Mercer says UK pension funds need a change in approach
Greg Wright, head of UK property funds at Mercer Human Resource Consulting, recently predicted that UK pension funds that don't start expanding their mandates into mainland Europe and beyond may start seeing lower returns. Wright told Investment & Pensions Europe that current UK pension fund managers don't have the skills and experience to execute the necessary expansion, and that the funds will have to upgrade their management if they want to take advantage of foreign opportunities. He said that in the UK investors will be looking at returns of seven percent to eight percent, whereas less efficient markets offer the opportunity to generate higher returns.
Investors want more European real estate
Investors want more European real estate A new survey shows that despite concerns about too much money chasing too few assets, investors are expressing a fundamentally positive outlook in the European real estate market. Respondents to the third annual Emerging Trends in Real Estate Europe 2006 survey, published by PricewaterhouseCoopers and the Urban Land Institute, said there is increasing consensus that European real estate has been repositioned as an asset class. Survey respondents also said that overall investor sentiment is hugely weighted to the ‘buy’ side, with even the lowest-ranked city markets receiving many more ‘hold’ recommendations than ‘sell.’