German investment law provides institutional investors, which are legal entities, the opportunity to organise – in a particularly efficient manner in terms of both management and taxation – their real-property investments already existing in Germany or are going to be effected there. This can be carried out through interposing a specialised property investment fund (SPIF) owned by the investor or investors themselves, which has been established in accordance with the
German act on investment funds.
According to this investment law (the ‘KAGG’), a SPIF is a regulated real-estate investment fund, consisting of segregated assets. This means that a SPIF is a special-purpose fund which, in accordance with the relevant statutory provisions and contractual terms, is invested in real estate or in property companies while adhering to principles of risk mixing and diversification in the composition of such fund. Any such SPIF can be owned by a maximum number of 10 legal entities, held in trust by an investment trust company, and monitored, as it were, by a custodian bank as well as by a committee of independent property experts.
The German SPIF – although in existance for 25 years – has been a sleeping investment giant for a long time.
But for a few years now, this giant has been awake and growing rapidly. Of late, investors have increasingly recognised the unbeatable advantages of a SPIF for property investments in non-domestic countries.
Since 1996 (see table 1) the number of SPIFs and their investment volumes have quadrupled. While in 1996 only five investment-trust companies existed which offered SPIFs. This number increased to 14 by year end 2001 (see table 2).
A British-German joint venture, namely Warburg-Henderson, started this year has received permission to operate a KAG in order to be able to offer and manage SPIFs. Other companies are striving for such a licence, which is not surprising in this extremeley strong and growing market segment of SPIFs.
The holders of SPIFs (table 4) are most interesting because they represent very powerful institutional investor groups.
More than three quarters of the SPIFs volumes belong to domestic insurance companies and pension funds; charities and non-German investors hold around 10%.
Moreover, in view of the fact that German insurance and pension fund finance managers arrange their property investments more and more via SPIFs instead of investing directly, the future expansion of SPIFs is predicted, as can be deduced from the growth rates by SPIF investor groups (table 6) .
Research by the author has shown that the portion of SPIFs in relation to all property investments of insurance companies and pension funds has made enormous strides during recent years (see below).
Thus it is predicted that this proportion will grow to 25% and even 30% easily within the next five to 10 years with the major trend for German institutions to undertake property investments more in EU ex-Germany than within Germany. This will be all the more likely since the Forth Capital Markets Promotion Act, just passed by both houses of German Parliament, has liberalised the German investment law to European standards, particularly regarding property funds.
Already, the proportion of European transnational property investments which is done by SPIFs is very impressive (see table 5). According to research made by Jones LaSalle/ Oppenheim Immobilien-KAG the overall volume of European transnational property investments in the year 2001, as shown in the pie chart comprised around E18.4bn in volume. SPIFs had to invest around E2.3bn of fresh money in the same period (as well as investments which were effected out of their capital stock). If one compares the 2001 results of table 5 directly with 88 new SPIF single real estate investments in Europe outside Germany with 712,949 square metres usable surface on the one hand and with the influx of E310m from outside Germany into SPIFs during the last year on the other hand, then you can guess with a certain degree of accuracy that about E1.8bn or 10% of Europe’s transnational property investments in 2001 was done via SPIFs.
Sooner or later non-German institutional investors will discover the SPIFs as an ideal non-domestic property investment vehicle – of that I am sure.
Hans Karl Kandlbinder is an investment consultant, based in Grafing, near Munich. A more extensive analysis and study by the author of SPIFs is being published this month in “Immobilien & Finanzierung / Der Langfristige Kredit” (issue 13/2002), Verlag Helmut Richardi, Frankfurt.