Fitch highlights inherent flaws in German property fund model

Ratings agency Fitch has said the news of planned liquidation of Credit Suisse’s €6bn CS Euroreal open-ended real estate fund is not attributable to the specific vehicle, but to “structural flaws” in the troubled sector.

CS Euroreal’s management has the flexibility to sell down assets over a number of years, and they have sworn their goal is to pay out investors in the most agreeable way as possible.

CS Euroreal is far from being the only such fund in the €85bn sector to be hit by illiquidity and redemptions it struggled to meet.

Back by August last year about one fifth of assets in the sector were already frozen from redemptions.

Now 30%, or €23bn of assets, is frozen, according to Fitch.

It is an embarrassment for many managers who had distributed the products as ‘low risk’ investments.

Union Investment temporarily shut its Uni Immo Global shortly after the Japan earthquake, making headlines when it said property holdings that were affected by the natural disaster were impossible to value fairly.

Following this, the €6.4bn SEB Immoinvest suffered a similar fate.

But the problems were not isolated to Germany – Aberdeen in the UK also froze its property fund.

Fitch said: “German open-ended real estate funds are one of the last segments of the European fund industry with a large structural liquidity mismatch. Historically, they offered daily liquidity despite being invested in property assets, whose disposal to meet redemptions might take some time.

“This fund structure has proved difficult to sustain in light of market conditions and investor redemption requests. Regulatory efforts have sought to address the liquidity mismatch in these funds, providing for annual redemption only. Unfortunately, this change was too late to prevent large investor redemptions.”


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