GERMANY - The German government is doing its utmost to rescue the country's open-ended real estate funds from their current liquidity crisis and enable the sector to operate on a sustainable basis.
German open-ended funds (GEOFs) and liquidity problems are nothing new - their history is marked with a number of liquidity problems, prompted by mass outflows and subsequent redemption freezes. It is one of the inevitable challenges that come with offering daily liquidity on investments that are based on very illiquid assets.
But the government believes it has found a solution to the problem: creating a clearer distinction between retail investors - or individuals - and institutional investors. It is the latter that have the capacity to cause liquidity problems when they decide to allocate capital away from GEOFs simply through their critical mass.
Most larger institutional investors invest in closed-end Spezialfonds (many others are now following suit), which are designed specifically for the institutional market, but some institutional investors have stayed with open-ended funds because they are legally required to have six-month liquidity in their real estate investments.
The latest draft legislation, revealed last week, aims to tackle the retail-institutional conundrum by introducing a minimum holding period of two years. Furthermore, there will be a 10% charge on redemptions within three years of making an investment and a 5% charge within four years.
Germany's investment and asset management association BVI has criticised the draft legislation, calling for a shorter, one-year holding period and lower redemption charges - 5% for redemptions within two years and 2.5% within three years. Minimum terms, it argues, cannot prevent investors from performing large withdrawals when the terms expire.
Union Investment, one of the largest managers of GOEFs, believes the legislation is going in the right direction. Spokesman Fabian Hellbusch says: "We especially welcome that daily redemption is granted for private investors to a certain level and that periods of notice are substituted by minimum holding periods."
But the company would like to see some changes, agreeing with BVI that the holding period should be reduced to 12 months. Union also wants to see a higher maximum monthly withdrawal level for investors, which current proposals place at €5,000.
"Besides this, the strict separation of private investors and institutional investors is essential to make sure sudden liquidity shortages don't occur in the future," Hellbusch adds. "Periods of notice combined with redemption fees for institutional investors are risk adequate and appropriate for this investor group."
Meanwhile, the European Public Real Estate Association (EPRA) has described the government's latest in a series of ongoing reforms of the GOEF sector as "propping up an ailing" model. The trade association is in the business of promoting listed real estate markets in Europe and has bemoaned the lack of growth in Germany. Figures suggests that, with the exception of Italy, Germany has the lowest proportion (1.6%) of its underlying real estate held by listed companies from the 10 largest global property markets. The international average is 5.1%.
Philip Charls, chief executive at EPRA, said: "The problems the German open-ended funds face are similar to those seen in the past in other countries like the Netherlands, Australia and the US.
"The suggestions we have made - to allow unit holders to convert the fund assets and liabilities into a REIT [real estate investment trust] - have been successfully used in the past in similar situations, where the result was the constitution of a leading listed real estate sector, improvement of transparency and better investor protection."