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.
Subject to controls
All of these partners – that is, SPIF, investment-trust company, and custodian bank – are subject to annual auditing and to government supervision by the Bonn-based Federal Authority for the Supervision of Banks, in order to ensure that relevant statutory provisions as well as contractual terms are always observed.
In real economic terms, the holders of the certificates issued for a SPIF are de facto the quasi-owners of the assets comprising such a SPIF, even if, formally, the real property of the specialised fund has been placed on the public register as property of the investment-trust company. The reason for this is that for regulated real-estate investment funds, a solution involving a fiduciary relationship is prescribed by law; and is absolutely and perfectly tantamount to any arrangement providing for joint ownership, which would be conceivable in theory.
Protection of the assets of the SPIF against any bankruptcy of the investment-trust company entered in the public register as the owner of the landed property of the SPIF (such bankruptcy being conceivable only theoretically anyway) is absolute and perfect for quite a number of legally fixed reasons.
The assets of a SPIF are also protected against the effects of mismanagement or other misuse by the investment-trust company, for it is not only independent institutions such as the custodian bank, the auditing firm, and the committee of experts which ensure a proper conduct of business, but it is also the investors themselves that have substantial participatory and disposal rights ruling out mismanagement and misuse by third parties.
Functioning and organisation
Against the concept of specialised funds, there are in fact only psychological inhibitions in the minds of those acting as decision-makers for potential institutional investors:
q An investor is no longer the direct owner of its real property;
q An investor must adhere to certain rules pertaining to risk mixing and diversification; they may no longer manage things as they please;
q An investor must disclose the investments to third parties in the broadest sense (including external supervision by government authorities);
q An investor will have to let ‘its’ real property be co-managed by others, and to let others participate in the profits; it is also ‘dependent’ upon a committee of experts.
On closer inspection, however, it will become obvious that these requirements are not arguments against SPIFs; for in economic terms, an investor will, by virtue of its certificates, remain the de facto owner of the assets of a SPIF.
Moreover, investors will, through this type of investment, avail themselves of substantial benefits which would otherwise be unattainable; and, in the final analysis, certain checks and barriers will be in the best interest of an investor receiving assistance of a high standard, in terms of both language and local knowledge, and in a foreign country at that.
Charts 1 and 2 show in a nutshell the mixing and diversification rules for risk spreading and the functioning of a SPIF.
Due to the forementioned psychological reasons the SPIF – although existing since 25 years – has rested a sleeping investment giant for a long time.
But for a few years now, the giant is awakening and growing rapidly: Lately investors recognise more and more 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 tripled. While in 1996 there existed five investment-trust companies only which offered SPIFs, their number was 12 by year end 2000 (see table 2). But it is known that three more companies in the meantime have applied for permission to operate a KAG in order to be able to offer and manage SPIFs.
The influx of fresh money into SPIFs has stablised at a high level (see table 3). More than three quarters of the SPIFs volumes belong to domestic insurance companies and pension funds; charities and non-German investors hold around 10% each (see table 4).
In the newly devised table 5, it is demonstrated how far and effectively the SPIFs have become a truly European investment vehicle – but only gradually. 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.
Research by the author has shown that the portion of SPIFs in relation to all property investments of insurance companies and pension funds has grown rapidly during the last years from around 3% in 1996 up to more than 11% in 1999.
And it is predicted that this relation will grow up to 25 % easily within the next five to 10 years within the major trend for German institutions to undertake property investments more in EU ex-Germany than within Germany.
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 Der Langfristige Kredit (issue 14/2001), Verlag Helmut Richardi, Frankfurt