During COVID-19, real estate is considered a safe investment, especially given the situation on the stock exchange in the first half of the year. Analyzes by the Scope rating agency have shown, however, that open-ended real estate funds are now also at risk as supposedly secure sources of returns.
Open real estate funds are considered to be a sure source of returns because they are hardly exposed to short-term risks and their value has risen steadily in recent years: “Hardly any investment segment has shown such stability in recent months as the open real estate funds”, writes the Scope rating agency in one Press release. Nevertheless, the current COVID-19 crisis has a noticeable impact on the profitability and risks of the real estate portfolios – especially those whose focus is on commercial real estate.
Inventory revaluations are no longer a return driver
And: “While the capital markets recovered significantly in the second quarter from the massive losses in the wake of the Covid 19 crisis, the open real estate funds are getting the effects of the crisis […] to be felt only gradually. “
This is due, among other things, to tenants of commercial properties who, in view of the crisis, can no longer make rent payments or are negotiating rent reductions. According to Scope, the situation looks particularly bad in retail and the hotel industry, but office properties are also affected.
In addition, inventory revaluations, which have contributed a large part to the increase in the value of real estate funds in recent years, will disappear during COVID-19, explains Scope in an analysis.
Developments can no longer be foreseen easily
In a study, Scope analyzed 16 real estate funds that focus on commercial real estate and that were opened before 2019. The result: In the first half of 2020 (H1) 2020, a positive performance averaging 0.9 percent increase in value was recorded – the net inflow of funds amounted to 4.4 billion euros. In the same period of the previous year, the values of the study were plus 1.6 percent and 5.7 billion euros.
In the course of this loss in value, twelve of the open-ended real estate funds analyzed by Scope were downgraded, with the average rating still being “A”, which is classified as acceptable for investors.
However, since the funds focus on different asset classes, they will develop differently – but in which direction it is unclear, as the development of the pandemic itself is difficult to assess. However, it could be that some of the open-ended real estate funds examined will experience negative performance as a result of the pandemic and its effects: The open-ended real estate fund as a sure-fire generator has disappeared for the time being.
Open-ended real estate funds are doing better than in 2008/09
Despite all the uncertainties, there is good news: the situation is not as bad as it was during the 2008/09 financial crisis. At that time, 18 open-ended real estate funds had to be closed for liquidity reasons – these funds managed a total of around 26 billion euros. Scope expressly states that such a development is currently not in sight, which can be explained by two factors:
First of all, the examined funds are liquid and 20 percent of the total fund assets of around 100 billion euros are available. Furthermore, (as of May 2020) there were no unusually large outflows of funds – this investor behavior is probably due to the minimum holding and notice periods introduced in 2013.
So at the moment the situation is uncertain and difficult to predict – but it could be a lot worse. Scope is forecasting total returns of 1.5 to 2.0 percent for 2020, while fund managers surveyed by the rating agency assume an average of 2.0 to 2.5 percent. Compared to the previous year, the yields have fallen by around one percentage point.
Image Sources: lucky eyes / Shutterstock.com