German property fund ban drives managers to Luxembourg

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Berlin’s proposal to prohibit launching new open-ended property Spezialfonds may not be stopping real estate managers from launching new funds, but it is forcing them to choose Luxembourg for the task.

In July, Berlin proposed the launching of new open-ended real estate fund and real estate Spezialfonds, as part of its implementing European-wide plans to regulate alternative products within the Alternative Investment Fund Managers Directive (AIFMD).

This caused a wave of disagreement from managers and industry practitioners alike.

Germany’s fund trade body Bundesverband Investment und Asset Management (BVI) warned that abolishing open-ended property Spezialfonds in Germany “will force the German institutional investor to look beyond Germany to Luxembourg and Ireland.”

BVI’s concerns about a move away from Germany to Luxembourg have already been proven right, as managers choose the more liberal jurisdiction to launch new funds.

An example is Germany’s Universal-Investment, which has recently launched its first real estate Spezialfonds and plans to launch others in the near future. The manager did not have to worry about the regulation. It simply launched the fund on its existing Luxembourg-based platform.

Alexander Tannenbaum (pictured), managing director at Universal-Investment, said his firm “has the advantage of being able to launch real estate open-ended Spezialfonds via its platform in Luxembourg, which is not affected by the German national law”.

Some smaller real estate fund managers, though, may not have Luxembourg operations in place, so adapting to the new regulations would be more difficult for them.

Property fund manager Warburg – Henderson, a Munich-based joint venture between property manager Henderson and independent private bank M.M.Warburg, expects the industry to “adopt a new closed ended real estate Spezialfonds“.

It also says its own business will not be affected by the rules, since it offers a variety of different real estate vehicles.

Yet, along with other market participants, the manager sees no sense in banning real estate Spezialfonds, especially since the investment vehicle has fared as well as a regulated product during the crisis.

The BVI points out “there have not been any problems with [Spezialfonds] products and they are in high demand with institutional clients.”

The fund structure remains the most popular and accessible for investors. In the past decade, fund volumes of property Spezialfonds more than quadrupled, from €8bn to €34bn.

The structure is also more suitable for large institutions affected by regulations such as Solvency II, which prohibits investment in closed-ended alternative funds, due to their riskiness.

Warburg-Henderson expects that “if new real estate Spezialfonds are indeed prohibited, investors might be forced to focus on Luxembourg fund structures”.

The debate is particularly worrying, since property investments have been historically particularly popular in Germany as an income-yielding alternative to government debt, where 10-year investments have yielded 1% or less.

In contrast, returns on property investments are stable and relatively attractive and the asset class offers a degree of inflation protection, advocates say.

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