German open-ended real estate funds with record inflows and a near 50% jump in investment volumes

Germany’s open-ended real estate funds attracted more than EUR 6.7bn net inflows in 2017. Investment activities rose to EUR 9.2bn – an increase of almost 50% compared with 2016. Germany replaced the US as the top investment destination.

The European rating agency Scope has analysed 13 German open-ended real estate funds for private investors and seven targeted at institutional investors with combined assets under management of EUR 85bn.

Scope has upgraded five of the funds this year, downgraded one, and rated “grundbesitz Fokus Deutschland” for the first time.

Despite an increase in capital inflows, the average liquidity ratio has fallen from 22.2% to 21.0%, as a result of effective liquidity management and active investment. At over 20%, however, the average liquidity ratio remains at a comparatively high level.

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The average occupancy rate, as weighted by fund assets, is currently 95.3%. This is a 0.8pp increase on last year’s figure (94.5%). The sustained increase in occupancy rates for properties in the portfolios of open-ended real estate funds is largely due to the positive macroeconomic environment in Europe.

In 2017, open-ended retail real estate funds evaluated by Scope invested EUR 9.2bn. By comparison, the sum of properties purchased was EUR 6.3bn in 2016. The increase in investment volume is primarily attributable to continued high capital inflows. The two most active funds in 2017 were hausInvest and UniImmo:Europa. Both funds invested more than EUR 1.5bn.

In 2017, Germany ranked first by allocation per country, receiving a quarter of total investments, or EUR 2.3bn. The UK follows Germany in second place with EUR 1.7bn or 18% of investments. While the US is no longer the most popular investment region (as it was in 2016), fund managers still invested EUR 1.5bn in US real estate. This corresponds to 16% of total volumes.

Market survey: All issuers of open-ended real estate funds have assessed their position this year as good or very good, with the upbeat mood showing no signs of changing for 2019. Almost 60% of issuer expect significant inflows this year (more than 5% of total portfolio volume). Around a quarter of those surveyed expect moderate inflows. Only 15% expect inflows to stagnate and no issuer predicts net capital outflows. Expected returns are significantly higher than in last year’s survey.

“Property prices are high, but the yield differential over alternative investments is so attractive while monetary policy remains loose that fund managers have good reason to be optimistic for this year and next,” says Scope analyst Frank Netscher. “The high capital inflows in existing funds have led to new issuers entering the market.”

“Europe’s property markets are hot but they are not in bubble territory,” says Sonja Knorr, Head of Alternative Investments at Scope Analysis. “Nevertheless, finding attractive properties remains the greatest challenge for asset managers. As a result, managers are increasingly taking greater risks when purchasing properties as they seek to invest capital inflows.”

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