Planned ban on open-ended property funds will hit Germany hard, warns trade body

Berlin’s proposal to prohibit launching new open-ended property funds and property Spezialfonds, as part of implementing European-wide plans to regulate alternative products will hit German investors hard, cautions the national fund trade body.

The German Ministry of Finance’s proposal, made as part of its folding into local law the contentious Alternative Investment Fund Managers Directive, stops managers establishing new open-ended real estate funds, or real estate Spezialfonds in the country.

Existing open-ended funds will be subject to a “grandfather clause”, under which the old rules would continue to apply.

Open-ended real estate funds in Germany have recently experienced significant problems, and many had to suspend redemptions as withdrawal requests arrived faster than many managers could sell properties to satisfy them.

Yet according to lawyers Dechert LLP, the AIFM-inspired restriction to the industry is a surprise, since it was only in the recent amendment to the German Investment Act that new restrictions for open-ended real estate funds were introduced.

Thomas Richter (pictured), CEO of Bundesverband Investment und Asset Management, said a ban on open-ended real estate funds would “force many smaller investors out of the real estate market,” forcing them to restrict their investments.

This is “socially unfair,” he said.

The minimum investment for an open-ended vehicle is just €25 and average returns over the past three decades have been around 5.4% per annum. In comparison, minimum allocations to closed-ended funds are often €50,000.

Additionally, the BVI points out, closed-ended funds do not offer the same diversification as open-ended vehicles, and are not an alternative for small retail investors due to the long lock-in period.

An even bigger surprise, however, is the planned abolition of property Spezialfonds, which have had no liquidity issues, and have enjoyed continued demand from institutional investors.

In the past decade, fund volumes of property Spezialfonds more than quadrupled, from €8bn to €34bn.

With interest rates in Germany at or near all-time lows, investors need the stable returns from real estate investments.

Additionally, the legal framework of the Spezialfonds structure makes it possible to invest for insurers affected by Solvency II, which prohibits investment in closed-ended alternative funds.

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

Richter says: “Abolishing open-ended real estate Spezialfonds will force the German institutional investor to look beyond Germany to Luxembourg and Ireland.”

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