Effects of the pandemic on open-ended real estate funds

The rating agency Scope has analyzed the performance of 14 open-ended real estate funds in the Corona year 2020 and recently published it: As expected, the performance fell – and in connection with it, for the first time since 2013, the yield difference compared to government bonds.

At the end of March, the Scope rating agency published its annual analysis of the performance of 14 open-ended property funds. The funds have been constantly compared over the past 15 years and managed a total of 100 billion euros at the end of December 2020. Scope calculates in the press release that they take up 90 percent of the market.

Yield spread to government bonds fell for the first time since 2013

In the analysis, Scope places a special focus on the average performance of the funds: This was 2.9 percent in 2019, but fell to 2.3 percent in the Corona year 2020. In addition to the performance of the funds themselves, the yield difference or the yield gap to the government bond was also compared. This difference in return is also known as “excess return” or “premium”.

And at this point Scope reports on a relevant development: The growth in the yield differential, which has been rising steadily since 2013, came to an abrupt end in 2020.

The yield difference between the funds and government bonds is now below three percentage points again

Because the yield on government bonds in 2020 remained at the previous year’s level of -0.6 percent. This means that after the fund’s performance had fallen to 2.3 percent at the end of 2020, the difference in returns is only 2.9 percent. However, this is a better figure than at the end of September 2020, when the average annual return had dropped to just 2.0 percent. This means that from May 2020 this value will be less than three percentage points for the first time since April 2016. In 2019, the yield difference between the -0.6 percent of government bonds and the 2.9 percent of open-ended real estate funds was a full 3.5 percent, which was a new record. According to the rating agency’s calculations, the average excess return over the past five years is 3.3 percent.

Reason for the development: The suffering of the hotel and catering establishments

Scope clearly sees the reason for this development in the contact and travel restrictions in 2020: since 2013, the fund’s performance has been mainly driven by the appreciation of the portfolio – an area that suffered greatly in the past year due to the situation in commercial real estate. In particular, the hotel and restaurant properties have suffered a lot, in addition to the failure and reduction of rental payments and even some terminated rental contracts with large customers who had to close their business because of the exit restrictions. This means a setback for those funds that have focused on real estate – especially since net rental yields rose again in 2019 for the first time in six years.

Scope: volatility remains very low at 0.52 percent

In 2020, the returns of the individual funds were between 2.81 and -0.99 percent. Scope writes: “The excess return of the open real estate funds is not the only one, but it appears to be an important determinant for the amount of the inflow of funds”. The latter fell by a total of 19 percent to 6.3 billion euros last year. Scope also expects the yield differential to decrease further and wrote in autumn 2020: “Due to the delayed effects on the real estate markets, possible effects of the crisis will only be reflected in the portfolios of real estate funds later on”. The first effects were already visible with the present analysis.

But Scope also has good news for real estate funds: Despite the crisis, the volatility of the funds has so far remained very low and stood at 0.52 percent at the end of 2020 – a year earlier it was 0.45 percent.

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