Spezialfonds continue to grow in popularity as German institutional investors target property from Berlin to Warsaw. Shayla Walmsley reports

German institutional investors can not get enough real estate these days. Over the past few years they have been looking to raise their allocations to real estate to diversify and hedge inflation, according to SEB Asset Management head of real estate institutional clients Christian Hanke. More recently, that trend has been compounded by Europe's sovereign debt crisis and the resulting woeful bond yields. The only question is how they invest - and there is no shortage of Spezialfonds managers eager to show them.

For example, Henderson Global Investors has raised €85m for its Retail Income Fund, giving the Spezialfond €175m to invest in German retail parks. Union Investment has secured €250m from an unnamed investor for a Spezialfond investing in residential assets in Berlin. In August, LaSalle Investment Management announced the launch of a €230m fund, with €170m equity raised from pension funds and insurers. The second Spezialfond launched by LaSalle's Kapitalanlagegesellschaft (KAG) fund management arm, it will invest in commercial assets across European growth cities.

"You have to draw a distinction between city level and country level. Germany has some pretty awful places, like everywhere else," says David Ironside, international director for Germany at LaSalle. "We're not necessarily just looking at real estate in the top 30 cities - though we're doing that, too. The unique selling point of this fund is that it's based on growth cities."

The structure is important. As a KAG, it's "a familiar product and tax-free", says Ironside. "It's a product German investors and fund managers know well."

A survey of 112 German institutional investors by Schroder Property published in mid-August found that 65% had invested in open-ended funds (GOEFs) but only 33% said they would invest in them in the next 12 months after a statutory change that will effectively penalise institutional investors by imposing minimum holding periods and redemption penalties on the structure. In contrast, 35% of institutional investors had already invested in Spezialfonds, and 41% planned to do so over the next 12 months.

German institutional investors scarcely needed encouragement for their risk-averse approach and the Spezialfond structure, but it came regardless in the form of the liquidation of the DEGI Global Business fund in August - the second GOEF to go after the manager's ailing DEGI Europa fund. Underlying the liquidation is a lack of liquidity, but also heavy losses in Croatia and Romania.

Although open-ended funds got frostbite from venturing too far east, prompted by overpricing in western Europe, fund managers are tentatively returning to central and eastern Europe (CEE) - though no one is venturing much further than Hungary. SEB Asset Management recently acquired a Warsaw office for €38m for SEB Europe REI, a Spezialfond aimed at German institutional investors with a conservative risk profile.
Investors in Poland never miss an opportunity to tell you the country avoided entering into recession - and the fund manager in this case also identifies that demand is likely to outstrip supply in the Polish market over the next 12-18 months.

The fund has a 10-15% allocation for CEE markets - Poland, the Czech Republic and Hungary - but it is unlikely to invest again in the next 12 months. "We've ticked the CEE box and we want a well-diversified portfolio," says Hanke.

In the meantime, funds are rethinking which of the mature western markets to invest in. Announcing its "shifting geographical focus" away from France and into other European markets, notably the UK, AXA Real Estate IM attributed the shift to a change in the strategies of its major clients. Among the latter, via a joint venture, is the Norwegian Pension Fund - Global.

The fund manager, which completed deals worth €2.1bn for its clients in the first half of this year, closed 80 of them - with a total value of €1.19bn - in Europe.

AXA France investors are looking for geo-graphic diversification, according to Alphons Spaninks, head of European transactions at AXA Real Estate. "Investors are looking to invest in other western European markets. We've succeeded in acquiring in the UK and we're looking for more. These are core deals. I won't tell you it will be an easy job finding more and some properties are definitely overpriced," he says.

Given that they and their fund managers are running out of attractively priced options, the question is, where will they go next? Not up the risk curve - at least not in the short term, says Hanke.

"German institutional investors have a stable appetite for pan-European property, especially in Germany," says Hanke. "They have to invest very, very boringly - and generate stable returns you can't get from the bond market. But if a government bond offers 2%, and their liabilities are 4%, there is a gap between what they earn and what they have to give their clients."

Joint venture
There are other fund options. A new Pramerica joint venture - effectively a feeder fund for the PRECO IV fund - will acquire Berlin residential as a value-added investment. The €120m Luxembourg-based joint venture, Preco Kauri CAB, has already acquired 13 assets with a view to refurbishing them and exploiting strong rental growth.
Elsewhere, Pramerica has raised £100m in additional capital from UK pension funds for its UK Ground Lease fund. Aviva Investors has also launched a similar product (see page 8 for full analysis).

Debt backed against infrastructure assets is also proving attractive to UK pension schemes. Barclays Corporate has made the recent running with its announcement of a £500m (€571m) infrastructure senior debt fund to be launched in the third quarter. Sterling-denominated seed assets (the fund manager will retain a 20% share in each of them) include social and economic infrastructure assets, renewables, electricity and waste-to-energy assets.

Likely takers? Among potential UK investors - the fund is targeting domestic pension scheme specifically - could be the Merseyside's local government pension scheme, which recently invested £20m (€22.8m) in AMP's Strategic Infrastructure Trust of Europe (SITE). It was the scheme's first investment for a discrete infrastructure allocation that will account for 2% of the overall portfolio.