EUROPE NEWS: Open-ended problem

Early next month, Germany will face a test of its open-ended property fund industry when Morgan Stanley’s P2 Value funds allows investors to redeem their capital for the first time in two years.

Morgan Stanley blocked the ability of investors to pull their capital out in autumn 2008 fearing that would trigger a huge fire sale of property to meet the redemptions requests.

With the two-year block now ending, all eyes are on the fund, with fears that investors might well want to pull out capital and further dent the image of German open-ended funds. Morgan Stanley has not been the only one to close its fund – around 10 vehicles, two of them managed by Aberdeen Asset Management, have also temporarily shut. 

Carsten Bödecker, of Taxand Germany, said those least affected seemed to be ones with a smaller amount of institutional investors.

He said debate is now raging in the country over the future of the product given that under German law these funds are supposed to offer daily redemption rights. “It is not a management problem but a systemic one. The problem is that we are talking about an illiquid asset in a liquid wrapper,” he said.

Bödecker  explained that the German government had responded to mass redemptions by producing a draft law for German open-ended funds that is currently under heavy discussion.

Among the details under discussions is the idea of allowing for only one or two redemptions a year, investors having to provide a notification period of between six and 24 months to redeem capital, and a 24-month lock-in period. But the domestic regulated fund industry is viewing it as a threat to a product that has existed for decades.

“The view is that the draft might be so strict that it would lose even more trust among investors,” he commented.

That said, Reuters reported in early September that the German government had drafted terms so that investors could pull out money when they wanted, but with a limit of €5,000 a month.

The pressure on the product coming from the government puts the Morgan Stanley fund under an even stronger spotlight. The hope of investors was that the fund would recover, but it may need to sell real estate on a huge scale when it does open on 1 November, as expected.

It has written down its portfolio from €922 million to between €820 million to €870 million. However, Walter Klug, head of the fund, said last month that he was optimistic investors would stay in. “Independent researchers see a possible recovery in real estate values in the markets in which the fund is active,” he added.

If the reopening does present another damaging chapter for German open-ended funds, it could benefit those able to provide so-called “special funds”, where institutional investors set up separate accounts with a fund manager and don’t have to worry about redemptions by co-investors.