No longer on a roll

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There have certainly been better years for German specialised real estate investment funds (Immobilien-Spezialfonds), as in 2003 they failed to maintain the out-and-out boom seen over the previous five years. Receipts of over E1bn amounted to little more than one-third of the receipts for 2002. The public funds (Publikumsfonds), too, took in less new money, although in this case the decrease from 2002 to 2003 was a mere 5%. There are a variety of reasons for the sharp decrease in Spezialfonds:
o upcoming regulatory changes in investment and insurance supervision law have led to investors deferring their decisions about launching Immobilien-spezialfonds.
o potential investors have been somewhat unsettled by discussions about the possible effects of the IFRS (formerly: ‘IAS’) on Spezialfonds investments in investors’ accounts. Faced with this dilemma, a number of investors are now looking at other vehicles, such as the GmbH und Co. KG, where a private limited company acts as a general partner for a limited partnership, and leaving their real estate portfolios in the hands of external managers.
o a further increase in external financing is causing the volume of managed funds to rise more slowly than the value of the managed assets.
o the healthy development of the equity markets in 2003 offered better investment opportunities in the shorter term.
The essential reason for the conspicuous decline in receipts could, however, have something to do with rates of growth now quite simply returning to a normal level, having been unusually high in previous years. Receipts, totalling just below 9% of the previous year’s volume are disappointing only in comparison to previous years (2002:33%, 2001:36%) and, of course, compared to the Publikumsfonds (19%) - these are retail funds normally available to the public.
For the current year, the overall picture looks much the same as in 2003. In the first three months of this year, the Immobilien-Spezialfonds took in €210m, more or less the same as the receipts for the first three months of 2003 (€218m). However, February also saw two outflows of funds, totalling €27m, one by the insurance companies and the other by the foreign investors. Accordingly, net receipts in the first quarter of 2004 remained 16% down on the same period the previous year. There are, however, hopes that this situation will improve once investors become more confident about the new framework conditions.
The managed funds volume grew by a total of €1.1bn, equivalent to a growth rate of 14.8%. In this regard, once again some reference should be made to the good overall performance of real estate investments. A comparison of the level of receipts, at 8.8% of the previous year’s volume, with the 14.8% increase in total managed fund volume over the previous year gives a yield of approximately 6% on capital employed.

New providers
In 2003, as in 2002, three new real estate investment fund management companies (Immobilien-KAGs) were set up.
The KanAm Grund Spezialfondsgesellschaft which is, incidentally, the only company in the sector in which the plan managers hold a stake. Itst Spezialfonds was not launched until this year, so it has not yet been incorporated into the statistics.
The IVG Immobilien KAG launched two Spezialfonds under the old law in December, neither of which has yet acquired any properties. It seems rather unlikely that this will ever happen, as after the change in the shareholder structure, it is possible that the Spezialfonds business will be dropped. IVG AG then acquired just over 50% of the market leader, OIK, which means that IVG KAG and OIK are now sister companies. As neither IVG nor OIK is now likely to be closed, IVG could now enter the Publikumsfonds business.
The third new company, Areal KAG was set up by AarealBank. Areal KAG is currently launching its first Spezialfonds, which is to acquire office properties in Scandinavian countries, with the exception of Norway. The fund, with a target volume of €250m, is to be sold to a number of investors, and seems at the moment to be the only Scandinavian fund.
Aachener Grund is one of the oldest Immobilien-Spezialfonds KAGs, but up to now virtually the entire Spezialfonds volume has been used exclusively for old-age pensions for church employees, with units being held by a pension fund specialising in this type of business and also by a number of ecclesiastical organisations as capital cover for pension claims. At the end of last year, AachenerGrund launched the firstSpezialfonds for a non-ecclesiastical investor. This could be taken as a signal that the company intends in future no longer to restrict itself to its core clientele.
In the current year, only one new company has been set up to date, TMW in Munich. There are no official reports of further new set-ups or licence extensions or plans. The wave of set-ups of recent years therefore seems to be ebbing, in parallel with the falling of the very high growth rates.

New funds, shift in market shares
The number of Immobilien-Spezialfonds has risen by 15, from 60 to 75, compared to 10 new funds the year before. Except for one company, all real estate KAGs managed to increase their managed Spezialfonds volumes, although there was a very considerable difference in rates of growth. The highest growth was achieved by Gerling Investment, which more than quintupled the previous year’s volume of €19bn. While Oppenheimer Immobilien-Kas (OIK) recorded the highest growth in absolute terms, with €335m, its growth rate of just 6.8% was well below the average for the branch, which increased overall volume by 14.8%. Only MEAG and APO Immobilien, with growth figures of €316m and €311m respectively, come anywhere near OIK. For both companies, this represents a rate of increase of 87% and moves each of them one place up the rankings in terms of managed fund volume (to 5 and 6, respectively).
At the same time, there has been a shift in market shares, with OIK conceding another three percentage points to the current level of just below 39%. The next four largest companies also lost a total of 2.4 points in market share. The winners were MEAG and APO, each of which managed to gain almost two percentage points, giving each of them a current 5% market share.
In overall terms, the concentration of the branch remains high. The nine smaller providers are managing only 8.2% of total fund volume, just 0.9 percentage points more than the year before. The two largest providers alone have a combined total of over 55% (previous year: 59%).
The statistics do not include those funds which, although they are managed exclusively for institutional investors, are set up as Publikumsfonds. They include DEFO-Immobilienfonds 1, which goes back to the days before the 1990 amendment to the investment fund management company act (KAGG), as well as SKAG Euroinvest Immobilien, which has been in existence since 1999 and has an exclusively institutional investor base. Since last year, this category of Publikumsfonds which are not actually available to the public has included another open-ended Immobilienfonds. DIFA, which last year had to accept the loss of a Spezialfonds, has now launched just such a fund.

Holders of Immobilien-Spezialfonds
The capital market statistics published by the German Bundesbank provide details of the composition of holders of Immobilien-Spezialfonds, in respect of both fund volume and receipts. The survey carried out by the present author, however, covers only volume, and its findings are different. The differences can be explained first of all by the sometimes different classification of investor groups and from a different system of classifying mutual funds (Gemeinschaftsfonds).
The Bundesbank allows only a single answer from the reporting KAGs on Form 10 380 under heading 08 ‘Type of unit holder’, even in the case of Gemeinschaftsfonds. Accordingly, if several investors from different investor groups have an interest in one Spezialfonds, the whole of the fund’s assets will be allocated to the investor group with the largest holding. This may result in that group’s volume being overstated and the volume of the other participating investor groups being understated.
As in the previous year, in 2003 all of the investor groups observed increased their investments in Immobilien-Spezialfonds, so that the discernible shifts in percentage shares are due solely to the different rates of increase. The most striking change is the gain by the institutional’s group of pension providers, ie, the pension funds, benefit funds and occupational governmental and/or company pension schemes. In this case, receipts had been relatively small in 2002 compared to the other investor groups, so that their share of the total volume had fallen from 34.1% to 29.0%. In 2003, however, this group invested more than the other Spezialfonds investors, raising their share by almost two percentage points to 31.8%. The insurance companies’ share, which had jumped between 2001 and 2002 by over eight percentage points to 54.7%, has now fallen back again, to 53.1%. In the meantime, the long-lasting trends among other investor groups are continuing, and so the share of the other licensed Spezialfonds holders, ie, the churches, foundations, religious-charitable organisations, associations and trades unions has further declined, and now also amounts to 5.8%, whereas it was 6.4% the year before and in 1999, for example, was still over 10%. The credit institutions, however, have once again increased slightly, and now hold 1.6% of Immobilien-Spezialfonds. The other commercial enterprises have similarly increased, and now stand at 0.9% (2002: 0.8%).
According to the Bundesbank’s statistics, the foreign Spezialfonds investors made only two relatively small allocations in June and July, as a result of which the value of their Immobilien-Spezialfonds according to the survey by the present author increased by a good €20m to €921m. As a result, their share of the total volume fell from 7.7% to 6.8%. The Bundesbank’s statistics traditionally show a much higher foreign share, which could be due to the different classification of Gemeinschaftsfonds. But here too there is a perceptible decline, from 13.5% to 12.1%.

Changes among insurers
Still the most important investor group for the Immobilien-Spezialfonds are the insurance companies, with an investment volume of €7.2bn. This is equivalent to a rise of €767m over the course of 2003. Regardless of how significant these amounts are for the fund companies, open-ended Immobilienfonds are relatively insignificant among the insurers’ capital investments. At the end of 2003, the capital investments of all insurance companies together amounted to over E1trn (1,060bn)
At the end of 2002 the primary insurers (there are no figures for the group of reinsurance companies) owned units of open-ended Immobilienfonds with a total value of €7.85bn. In 2001 the figure was €6.40bn, and at that point it had been estimated that the total at the end of 2002 would be €8.7bn. This estimate was based on the growth in Immobilien-Spezialfonds. One possible source of error in such an estimate are, of course, the reinsurers, which may also have acquired units in Immobilien-Spezialfonds, but which are not listed in the BaFin grouping. A further difference arises from the fact that the KAGs allocate the fund volumes to the investor groups at the current market value, whereas the units are reported in the insurers’ accounts at their book values. This means that for the insurers, the managed fund volume naturally increases more quickly than the value shown in the accounts. In the light of these imponderables, it would be unwise to make any further estimates. If, however, we add into the calculation the receipts figures recorded by the Bundesbank, €871m (disregarding pensions), and the €767m increase already referred to, the value of open-ended Immobilienfonds as shown in the accounts should have been in the region of €8.3bn at the end of 2003.
The figures show that in 2003 the proportion of real-estate investments in the total capital investments of the insurers has continued to fall – indeed, much more than had been the case the year before. The figures also show that not just the proportion in total assets, but also the absolute value of real-estate investments including those of the funds, has decreased, from €32.2bn to about €31.8bn.

Fall in the residential share
The residential housing share cannot be measured on the basis of its value, but simply on the basis of its square metreage, even though this means that all of the real estate listed in the property records has to be added. The result of this investigation is another perceptible fall in the housing share. As early as 2002, the residential share had fallen by one percentage point to 8.4%, while at the same time in absolute terms the figure for housing square metreage had actually risen by 20% to around 480,000 square metres. In 2003, however, it was not only the housing share that fell by 1.4 percentage points, to 7.0%. Much more remarkable was the fact that the absolute figure also decreased by 2.5% to just under 460,000 square metres. The view of some market operators, that a certain proportion of housing in a relatively large real-estate portfolio can help to improve the stability of earnings and value, does not therefore appear to be shared by most investors and KAGs.

Foreign share rises
The proportion of foreign properties in the total stock of properties held directly is also measured on a square metreage basis. After a considerable increase in this foreign share (in 1998 this had been just 10.8%) to 35.2% in 2001 and a fairly small drop to 35.0% in 2002, the quota has now risen slightly to 35.8%. Some funds that had previously focused exclusively on domestic Immobilienfonds were also involved in this rise in the foreign share. In some cases, investors had even declared the acquisition of foreign real estate to be strictly taboo, but now they are looking for more remunerative investments or better diversification that has been lifted. In the future there will still be Immobilien-Spezialfonds with occupied properties exclusively within Germany, if, for example investors are aiming for international diversification not within a single fund but by buying units in funds with a correspondingly diverse investment policy. Compliance with the regulations on monetary congruence for insurers is, however, no longer an argument for maintaining a purely national investment policy, as investments can be made throughout the Euro-zone without checking the currency risks. The main non-euro countries in which Immobilien-Spezialfonds own properties and/or holdings in property companies are the UK and, to a fairly small extent Switzerland and the US.

Holdings in property companies rise
The picture of foreign investments would, however, be incomplete unless holdings in foreign property companies (now ‘Immobilien-Gesellschaften’) were included. With 50 holdings and a 4.8% share of the total fund volume, these have now reached a size that can no longer be ignored. Holdings in property companies first appeared in the statistics in 1999, when they represented 0.5% of fund volume. In Figure 11, both trends have been graphically amalgamated. Even though this is not entirely correct from scientifically or mathematically, following a period of stagnation there are signs of a renewed and growing interest in foreign investments.

External financing rising
Another of the predominant trends that have continued in the period under review is the rise in external financing, which is linked to a further increase in the property quota (cf. Table 7 and Figure 9).
As mentioned in the introduction, the trend for increased external financing within the funds has contributed to the lower rate of growth in the branch. That is because many institutional investors are basing the real estate quota that they are aiming for within their total assets on the property value, rather than on the net asset value of the Spezialfonds. So Spezialfonds holders are able to raise their real estate quota without providing additional investment resources, by acquiring additional properties and raising the external financing in existing funds. Between 2002 and 2003, the value of the properties (excluding the property companies) rose by 22.4%, well above the approximately 15% increase in fund volume. The trend for increased raising of funds externally is also evident in the value of managed properties, which has increased from 113% to 120% of net asset value. Including holdings in property companies, invested assets actually amounted to 125% of the net asset value at the end of 2003.
The statutory limit of property value compared to net fund volume, under to the Investment Act, is unchanged, at 200% (up to 50% of the property value may be externally financed). And because Immobilien-Spezialfonds are able to command the best possible conditions for raising funds externally, many investors will welcome a further increase in external financing within the funds. The trend in the first quarter of this year bears out this assumption, as the value of properties has continued to rise over this period and at the end of March amounted to 126.1% of fund volume.

More housing, more square metres, cheaper properties
The number of directly held properties has topped the 1,000 mark for the first time. At the end of 2003 the Immobilien-Spezialfonds owned precisely 1,017 properties, not including the 50 properties of the 50 property holding companies. The total managed area has grown from 5.7 to 6.7square metres. This is nevertheless still less than the growth in 2002, which was 1.4m2, starting on the lower base of 4.3m. However, in 2002 the companies also had €4.2bn at their disposal for the purchase of properties (receipts + increased borrowing) and in 2003 only 2.3bn. The conclusion that can be drawn from these figures is that in 2003 the properties acquired were at lower prices per square metre than in 2002.

New framework conditions
Investment Act: In comparing the existing rules for open-ended Immobilienfonds in Germany and REITs in the US, one evident essential difference is that investors in domestic funds have to pay tax on 100% of the taxable income earned by the managed fund, while investors in REITs do not. This difference would give above all institutional investors who are liable for tax a pretext for deciding in favour of an REIT – but only if such a regulation seems reliable. Ultimately, investment in property relies on the regulatory situation applicable on acquisition remaining unchanged, if possible to the date of disposal.
The cautious changes for Immobilien-Spezialfonds resulting from the Investment Modernisation Act have shown that investors and providers can rely on this instrument for the long-term. There is therefore nothing to stop further healthy growth.
Till Entzian is a lawyer and consultant on Spezialfonds based in Frankfurt

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