It wasn’t long ago that groups offering restricted real-estate funds in Germany feared competition from products out of Luxembourg would strangle their growth.
That’s over now, and German offerings for institutional investors are growing continuously.
By late September, these funds were administering assets worth €49.3 billion, or $61.6 billion, according to the Bundesbank, Germany’s central bank.
In the first nine months of 2014, these assets increased by €5.1 billion.
“The net influx of funds will stay at this high level,” said Clemens Schäfer, managing director of RREEF Spezial Invest, which belongs to Deutsche Bank.
The largest share of the growth comes from increasing real-estate quotas of insurers. By the end of the year, these quotas are expected to increase to an average of 7.7 percent, according to a survey by the consulting firm Ernst & Young Real Estate.
Thomas Kuhlmann, managing director at Hahn Immobilien, described the practice up to now: “In the past, institutional investors didn’t tend to increase their share in real estate as much as they said they would. Back then they also had alternatives.”
Not any more. Government bonds with returns of around 1 percent – as well as the twice-as-profitable, but more risky bonds from Spain and Italy – are less of an option for insurers and pension fund managers than they used to be.
According to the IPD Analytics institute, restricted real-estate funds showed an annual return of 1.6 percent at the end of September. In itself, that would not be a reason to give them money. But that average is brought down by European-wide funds invested primarily in office buildings. In the same period, retail-property funds brought in 4.6 percent.
“The era of the big pool funds, for institutional clients investing billions throughout Europe, has come to an end,” said Reinhard Mattern, head of BNP Paribas Real Estate Investment Management. “Now, ideas for investment are regional, or based around a specific theme.”
This is illustrated by several recently launched funds. Hamburg-based ECE just purchased the Zielone Arkady shopping center in Poland, as the first asset in its second European Prime Shopping Center Fund. The Dr. Peters Group is setting up a restricted fund for hotel real estate. And Doric Investment is launching a fund for sustainable real estate together with a subsidiary of Raiffeisen Schweiz.
These examples show new trends as established companies see competition from niche groups specializing in a single segment. ECE focuses on large shopping centers. Beos concentrates on industrial real estate that is acquired and revamped for new uses.
Companies that used to offer closed real-estate funds also are pushing their way into the market. This group includes, for example, the Dr. Peters Group and Doric.
“Now, ideas for investment are regional, or based around a specific theme.”
These changes are accompanied by another trend.
“The funds tend to be smaller,” said Michael Schneider, managing director of Intreal, one of several providers of service capital management companies. The subsidiary of Warburg-Henderson, a provider of restricted funds, expects by the end of the year to manage assets in 38 funds that have grown to €7.6 billion.
With its target volume of €750 million, the ECE fund is an exception. It needs to be big in order to distribute risk across several properties. Intreal-Kunde INP Deutsche Pflege Invest is more typical; it hopes to reach a volume of €175 million by purchasing community-interest properties.
Service capital management companies help managers of real-estate portfolios by taking care of set-up and operations. The partners can then concentrate solely on buying, selling and administering the buildings in their funds.
A fully licensed capital management company would be too much trouble for a newcomer to restricted-market funds, said RREEF manager, Mr. Schäfer. “You need to be managing assets worth €2 billion in order to effectively operate a capital management company in the real estate field,” he said.
The head of Intreal, Mr. Schneider, doesn’t think his clients will jump ship when they reach that size. “They stay as they can keep their flexibility,” he said.
As interesting as this area may be, the managing director of Allianz Real Estate, Alexander Gebauer, said other factors matter too. “We aren’t waiting for new set-ups on the market,” he said. “For us, what’s important is a positive performance record, preferably going back 10 years rather than five.”
And Reinhard Mattern, whose real estate investment division at BNP Paribas operates its own capital-management service, is skeptical that new arrivals in the market will stay.
“The list of providers may grow longer in the short term,” he said, “but most likely it will shorten again in the long term.”
Reiner Reichel covers real estate and special funds for Handelsblatt. To contact the author: email@example.com.