Real Estate

FondsCorona infects open real estate funds

Commercial real estate at Düsseldorf’s Medienhafenimago images / Schöning

First the boutiques reopened, then the restaurants and hotels, and recently you can even go back to the cinema in many places. If you stroll through Germany’s inner cities these days, you could almost get the impression that the pandemic is over. But behind the scenes of the new normal, things continue to simmer. Retail sales are still far from where they were before the start of the Covid 19 crisis, data from the HDE trade association show. General manager Stefan Gerth fears losses of EUR 15 billion in the months of June to December – and warns of a wave of bankruptcies.

The retail crisis also affects investors who have invested in commercial real estate through funds. These distribute the capital over several properties and thus indirectly make investors landlords. The rating agency Scope expects the pandemic to lead to increasing risks and falling returns, especially in the office and retail space business. In June, the analyst house downgraded the ratings of twelve open-ended real estate funds, including the four thick ships Hausinvest, Deka Immobilien Europa, Uniimmo Europa and Uniimmo Deutschland. Only three out of 15 funds were able to maintain their rating. The evaluated products together manage around EUR 100 billion and cover almost the entire German market for real estate funds.

The scope analysts assume that the returns of the funds examined will in future only be within a range of 1.5 to 2 percent. Last year, their average return was 3.1 percent. The reason for the poorer forecast: “Numerous tenants are trying to renegotiate in the wake of the Covid 19 crisis and are implementing rents, especially in brick-and-mortar retail. This has an impact on the income of the funds and, in the long term, on the valuation of the properties, ”says Scope.

Real estate funds are in a better position than during the financial crisis

Germany’s retailers have been struggling with competition from online shops for years, the pandemic is now acting as a fire accelerator. The prospects are also gloomy for commercial real estate. Scope expects the crisis to reinforce the trend towards home offices, and there could be further layoffs in the wake of the recession. In less attractive locations in particular, this increases the risk that office space will be empty because the demand for presence jobs will drop.

Nevertheless, open-ended real estate funds are still in a much better position than in the financial crisis in 2008. At that time, they had to sell properties with billions of dollars in losses in order to be able to pay out investors who wanted to get rid of their shares. 18 funds with assets under management of around EUR 26 billion had to be closed due to a lack of liquidity and later wound up. In response, the legislator has tightened the requirements for trading in open-ended real estate funds. New investors must now hold their shares for at least two years. Anyone wishing to sell shares is subject to a twelve-month notice period.

From the analysts’ point of view, there is no danger that the turmoil from the last financial crisis will repeat itself. On the one hand, the funds had sufficient liquid funds of an average of almost 20 percent of the fund’s assets. On the other hand, there have been no extraordinary outflows of funds between the outbreak of the Covid 19 crisis and the end of May. The bottom line was that even more money flowed into open-ended real estate funds this year than out: The net inflows of funds in the first quarter of 2020 totaled around EUR 4 billion.

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