With open-ended real estate funds, investors can invest in concrete gold even if they don’t have the money for their own house. But how does it work? And what are the risks of such an investment?
Real estate is sought after by investors as an investment property. But the prices have been rising for years, so that one or the other may have burst the dream of owning a house. A consolation: Even those who do not have enough money to buy their own property can still invest in buildings with the help of open-ended real estate funds.
This overview explains how this works, where it differs from closed-end real estate funds and how high your risk is when investing in open-ended real estate funds.
What are open-ended real estate funds?
You can think of a fund as a kind of basket into which investors deposit money. This money is invested in various investment objects, such as securities such as stocks or commodities such as gold.
A open-ended real estate fund is, the name suggests, a fund that specializes in real estate. That means he invests at least 51 percent of the money he collects in houses. The remaining 49 percent of the fund’s capital can theoretically also be invested in securities such as bonds or shares.
Sometimes part of the investment money is also available as cash reserves. It is also important. If investors want to sell their shares, there must be enough money in the fund to pay them out. In addition to open-ended real estate funds, there are also closed real estate funds (see below).
The advantage of real estate funds: you as an investor benefit when the value of the real estate increases. As a rule, a manager determines which building your money will be invested in. His decision depends on where these properties are or what the chances are that the buildings can be rented or resold.
Open or closed real estate funds? What’s the difference?
The most basic: In one open real estate funds you can basically invest at any time. It’s different with closed real estate funds: These funds usually only invest the money in a property, for example an office complex.
As soon as there is enough money for the financing, the fund will be closed – and you as an investor will not be able to withdraw your funds for the next 15 to 30 years. Closed real estate funds can therefore not be traded on the stock exchange.
Higher yield only with much higher risk
The risk is much higher for closed real estate funds than for open ones. If the property in which the closed-end fund invests cannot be rented or sold, you as an investor can lose your money. However, the potential return, called return, also increases. However, think carefully about whether this is worth it for the very high risk.
Another difference: with an open real estate fund, you can get started with an investment of 50 euros or more. With closed real estate funds, you often have to invest at least 5,000 euros in one fell swoop.
In addition, closed real estate funds are often subject to a so-called “margin requirement”. That means: as an investor, you have to deposit money even if the fund is actually closed.
An overview of the most important differences:
|Real estate funds||open||closed|
|Investment object||many different properties||mostly just an object|
|Deposit||from 50 euros||from 5,000 euros|
|Additional funding obligation||No||possibly yes|
|Time of sale||basically at any time||after 15 – 30 years|
|Return||often two to three percent a year||often higher returns|
|costs||transparent||difficult to see through|
Why do open real estate funds make sense?
In short, because you can benefit if the property market is doing well – and the value of the property in the fund increases. This has been the case in large cities in recent years:
Because on the one hand more and more people want to live in the metropolises, on the other hand the European Central Bank (ECB) keeps interest rates low, many investors have invested money in the so-called “concrete gold” – which means that Prices for houses have risen sharply. You can participate in this increase with an investment in real estate funds.
The decisive advantage of a real estate fund versus buying an entire house: You can benefit in the long term from positive performance in the real estate market – without owning an entire building. This saves you time, money and, above all, effort.
What are the risks of an open real estate fund?
Open-ended real estate funds are generally considered to be a very low-risk investment. The reason: the fund invests very broadly – and doesn’t just rely on one property, as is the case with closed real estate funds (see above). Nevertheless, there are also risks with an open real estate fund that you as an investor should watch out for:
- Spread risk: This risk applies to every type of fund. The question is whether a fund is diversified enough. The fewer properties you invest in, the higher your risk. The more houses, the lower it is. But it is not just the number that counts.
It is equally important whether the real estate is only in one region – or is distributed across the world. It is also important what the properties are used for. A fund carries a lower risk if it invests in residential buildings, office complexes as well as in commercial buildings or hotels.
- Liquidity risk: It is possible that a fund has insufficient liquid funds, so that investors, if they want to get out, could not be paid out. That would be the case if many investors pulled out their money all at once. However, this problem was compounded by law Holding periods largely eliminated.
However, it is also possible that a fund has too much liquidity. This would be possible if many investors invested in this fund – without there being enough objects. A fund manager could then invest in riskier assets or buy overpriced real estate.
In addition, as with others Fund types: The older a fund and the longer a fund manager has been responsible for a real estate fund, the safer it is as a rule.
How can I invest in open real estate funds?
You can do this either with a bank, a savings bank, directly with a fund company, with an online broker or with a direct bank on the Internet.
In any case, you need one Securities account. With an online broker or with a direct bank in the network, there are usually no fees for this. The situation is different with branch banks. A deposit can cost 20 euros a year.
With the help of an online custody account, you can buy directly from a fund company or buy real estate fund shares on a stock exchange. The fund company usually determines by Assessment a price for a fund unit. This price is usually very realistic.
But be careful: The price when buying on a stock exchange is usually slightly different than the one that the fund company determined for a fund unit at the beginning. The reason: on the stock exchange, the price arises from supply and demand. So make sure that the price does not deviate entirely from the price that the fund company itself has determined. Otherwise you may buy an overpriced portion.
How do I compare open real estate funds with each other?
When comparing real estate funds, you should pay attention to various criteria. The main ones are the following:
- Distribution type: A real estate fund can be reinvested, then the rental income is reinvested in the fund. The opposite of an accumulating real estate fund is a distributing one. In this case, part of the rental income will be transferred to you as an investor at specified times.
- Costs: As an investor, you have to expect different costs. If you buy a share in an open-ended real estate fund directly from the fund company that launched the fund, a Front-end load due. This is usually more than five percent of the amount you want to invest. However, you can also buy a share directly on the stock exchange (see above). Then there is no front-end load – however so-called Order fees for the broker. In any case, you will have to pay annual management fees and the cost of a custody account.
- Yield: An important point is how much income an investment will bring you. Often, conclusions about the return can only be drawn from the past performance of the fund. But be careful: fixed rate commitments are dubious and can easily be unrealistic since nobody can predict the future. In general, the higher the return, the greater your risk of losing your money.
- Letting and liquidity ratio: The Occupancy rate provides information on what percentage of the space in the fund’s buildings is currently rented. The higher it is, the better. The Liquidity ratio indicates the proportion of fund assets that fund management has not invested in real estate, but as Cash reserve owns (see above). On the one hand, this reserve should not be too small so that the fund company can service returns from investors (see below). On the other hand, the liquidity should not be too high, however, because cash generally gives the fund less income than money invested in real estate.
How do I sell my fund share?
Just like buying, selling can be done in two different ways:
1. You can share your share in the Investment company return that launched the fund. The advantage: The fund companies determine a fair price for your share. In this case, however, you have to observe several deadlines:
- Minimum holding period: Before you can return your fund units as an investor, you must have held them for at least 24 months.
- Return period: As an investor, you must irrevocably announce this at least twelve months before you want to return your fund unit to the fund company. This prevents the liquidity risk (see above).
- Redemption dates: As a rule, a fund company redeems a share on every trading day, i.e. Monday to Friday (with the exception of certain public holidays). However, a fund company can also stipulate certain dates by contract, so that redemptions are only possible on these days.
2nd You can also buy your shares in the Stock exchange sell directly. In this case you save yourself the deadlines. As with the purchase, the sales price is not determined by the fund company, but determined by supply and demand. You must therefore be prepared to sell your fund unit at a lower price than that of the fund company.