German institutions are still attracted to Spezialfonds, but an appetite for more focused, nimble funds is re-shaping the market, says Barbara Ottawa

The problems that affected investors in Germany's open-ended real estate funds (Offenimmobilienfonds, or GOEFs) have been well documented. But less so some of the difficulties experienced in Spezialfonds - open-ended vehicles regulated specifically for institutional investors. The exit of a few large investors during the financial crisis led to major liquidity problems in the GOEF market - and subsequent regulatory reform - but Spezialfonds have not been immune to similar issues.

"Investors might also experience liquidity problems in Spezialfonds if a large investor wants out and no replacement is found," says Sonja Knorr, analyst at rating agency Scope.

Knorr describes Spezialfonds as "more of a closed shop", so problems are less talked about in the media. In her experience, though, investors increasingly "want to be on their own and not come under pressure to make a decision when other investors are facing problems."

This explains the decision by one large pension fund to set up a master structure in its real estate portfolio.

Hans-Wilhelm Korfmacher, managing director at the €1.8bn pension fund for chartered accountants in the German province of Northrhine-Westphalia (WPV) says this will "partly substitute or complement current Spezialfonds structures for Germany and pan-Europe".

"A master structure allows you more in-depth access to the investments, as you are not restricted to involvement via a Spezialfonds-committee - for example, you can determine [when to] sell and buy," he says.

In common with other European investors, German institutional investors are wary of exposing themselves too much to counterparty risk, in the form of other investors. And this is having a negative impact on the highly popular real estate Spezialfonds sector.

"When you are setting up a fund you have to be very careful about the type of investor you are pooling in the vehicle, as alignment of interest, preferably over a long period of time, has become even more important since the crisis," says Michael Ruhl, managing director at Schroder Property's Germany Kapitalanlagegesellschaften (KAG) business.

In order to facilitate this, shorter-duration funds are being set up. Ruhl says: "This way all investors have a clear focus and the KAG has a clear remit of setting up, managing and selling the portfolio.

"Products and investor requirements are changing," Ruhl says. Back in 2004 "these were very, very large products going into the hundreds of millions in assets or even into billions, with a pan-European or US-background," and they pooled up to 13 different investors.

Michael Schneider, managing director at IntReal, a third-party KAG provider and subsidiary of Warburg-Henderson, says: "The number of investors which would rather have as few co-investors as possible is increasing. We are even seeing interest in single-investor funds from very large institutionals," he says.

Iris Schöberl, head of F&C REIT Asset Management in Germany, said the firm "is careful about the type of investors in a Spezialfonds", for example, not mixing foreign investors or family offices with German institutional investors, to "ensure alignment of interests".

Christian Schulte Eistrup, managing director of European capital markets at MGPA, says there is less of a division among types of investor. He says: "The comments by investors tend to revolve around people they already know, they have invested with in the past or have worked with. But they do not want people who have previously been seen to behave in a way that was detrimental to co-investors."

Alexander Tannenbaum, managing director for real estate at Universal-Investment, adds: "Investors were not always spoiled with information regarding costs and transparency in these products," and they could not react when a fund underperformed.
Tannenbaum compares the process to the "professionalisation of market participants" which has taken place in the securitised assets sector. "For some time, institutions have been seeking to construct their own real estate portfolio and diversification rather than entrusting their money to one Spezialfond, which invests broadly," he says.

Tannenbaum says institutional investors are more frequently looking for a Master KAG, whereby a third-party provides the fund administration separate from the asset management. "A few years ago, investors were looking for someone offering both asset management and administration. But in the last two years institutional investors have focused more on transparency and flexibility, and effectively separating asset management and administration."

Ruhl confirms the trend: "Another incentive for Master KAGS, apart from diversification, is the fact that on a consolidated level investors only have to report the results of one master fund, which allows them to blur negative results in one single fund within the structure."

Tannenbaum adds: "By separating the administration from the asset management investors can link asset managers to the performance and more easily amend the asset allocation or the fund exposure."

The Master KAG structure also enables investors to focus on specialist Spezialfonds rather than looking to invest in a broader, pan-regional Spezialfond.

"Over the last 10 years, pan-European products have been very much in the focus of Spezialfonds investors, and it is safe to say that there will always be a market for diversified funds," says Schneider. That said, since the crisis IntReal has witnessed "a trend towards country and sector-specific funds - mainly Germany and Austria". Schneider adds that investors "want to exert more control and decide for themselves which sectors fit their return demands".

For example, F&C REIT is setting up a second Spezialfonds for German investors to invest exclusively in German retail. Schöberl remembers that in 2009 such a concept was "laughed at". Some placement agencies did not want to take on the fundraising for the fund "so we did it ourselves" she says.

Schneider says IntReal has two or three Spezialfonds in the pipeline. "At the moment, investors want to invest as quickly as possible and are focusing on Germany, particularly on residential, including nursing homes and German retail centres," he says.

Horrocks confirms that Henderson would like to launch another German retail Spezialfonds once its first one is sufficiently invested, while logistics is another area the UK investment house is looking into.

Tannenbaum expects Universal-Investment to finalise "five real estate mandates, as well as various initial requests, on themes ranging from specialised Asia funds to diversified Europe, with some investors showing interest in residential property or US-themed funds."