W.If you want to invest in real estate but don’t have the big money for it, open-ended real estate funds are still an alternative – even if it has not been so easy to withdraw the money when it is popular since the crisis in the 2000s.
According to an analysis by the Scope rating agency, the funds have performed well in recent years. This regularly examines 16 open real estate funds, the portfolios of which consist predominantly of commercial real estate. Together, the funds currently manage around 100 billion euros. In the past financial year, the funds examined were able to achieve an average return of 3 percent after deducting fund costs, which corresponded to the good previous year’s result and is still the highest average return since at least 2013.
The funds benefited from the boom that was not only prevalent in residential but also in commercial real estate. Scope reports that the increase in average returns has been primarily due to the upward revaluation of the existing properties since 2013, whereas the net rental return and, of course, the interest on liquidity have steadily decreased over the past six years. The return on investment, which was minus 0.5 percent in 2013, was plus 1.6 percent in 2019.
In contrast, the average net rental yield fell from 5 to 4.3 percent and for the first time in six years even increased by 0.2 percentage points compared to the previous year. Up until now, it was mainly the rising prices of new properties that had depressed rental yields, but the trend has now broken.
However, the lack of interest is particularly bitter for investors. Because while the overall result of the funds from rental and return on investment yielded a whopping 5.3 percent return, the cash holdings pushed it down to 3.9 percent. After all, the funds hold around a quarter of their assets as liquidity in order to be able to buy objects. And after deducting the costs, the average in 2019 was just 3.0 percent.
For the current year, however, the prospects are much less good. Analysts Hosna Houbani and Sonja Knorr believe that the upward trend in returns on changes in value will come to an end. Rather, these would fall, with hotel and retail properties Scope even expects negative returns on value changes, even if the extent cannot yet be conclusively assessed. In the medium term, falling office rents and a weaker transaction market would also have a negative impact. Shopping centers had already lost value in the past year and a half due to the e-commerce influences and investor reluctance, although this loss in value was still comparatively moderate in 2019.
The first effects are already noticeable. As of the end of September, the one-year return had already dropped to an average of 2.0 percent; for the year as a whole, Scope expects 1.5 to 2.0 percent. Individual funds could show negative returns.
For residential real estate funds, Scope is more optimistic. In the past, these also lived primarily from the return on investment, which will now weaken, but will remain positive according to the current status. In 2019, according to data from Scope, these brought an average yield of 3.9 percent, which should then be a little weaker. Two thirds of the income came from changes in value.