Spezialfonds are continuing to attract institutional capital, but their investment focus has shifted to domestic markets and larger individual assets, according to a new study. Barbara Ottawa reports

Over the past decade, the annual study of real estate Spezialfonds sector by the German investment industry association BVI has shown a marked internationalisation of real estate portfolios in Germany.

But institutional investors are returning home, abandoning former favourite investment locations like the Netherlands and France, the latest instalment finds. "The importance of the Netherlands and France has receded," notes Till Entzian, head of legal and compliance at Veritas Investment Trust in Frankfurt, in his summary of the study.

The report, initially set up by Hans Karl Kandlbinder and now compiled by Entzian and BVI, points out that France and the Netherlands were the first countries where real estate Spezialfonds (vehicles set up specifically to suit the needs of German institutional investors) bought property for their clients.

However, property outside the European Union has a strong position in investor portfolios, making up 7.4% compared with 2.8% five years earlier. The share of properties bought in Germany has increased to 48% from its lowest level of just over 40% in 2007.

Within Germany itself, investors are looking more towards provincial towns than the major conglomerations of the Rhine-Rhur and Rhine-Main areas. "While in 2005, 20.3% of the investments in total were made in those Rhine-areas, it was only 14.2% at the end of 2010," Entzian says. At the same time, the share of German small and medium-sized towns increased from 13% to 18.4%.

Real estate company Patrizia identified a similar move towards second-tier cities - mainly university towns - earlier this year. Marcus Cieleback, head of research at Patrizia, said second-tier cities offered a "similar level of stability and safety compared with top locations, but with lower prices and rents".

Andreas Trump, head of research for Germany at Colliers, also recognised a greater interest among investors for German cities, including what he calls ‘B-cities'.

Entzian also sees a change in the size and value of property investors are looking for. The majority of properties - around two-thirds - remain invested in the €10-50m range, but over the past five years the share of smaller properties below €10m has decreased significantly from 16% to 11%. Over the same period, larger properties between €50m and €100m have gained importance, now making up 15% (almost twice as much as the proportion five years ago).

As for the interest in Spezialfonds as vehicles of choice for institutional investors, Entzian says 2010 was an "average year" with inflows going back to historical averages (see figure 1). "A return to the high inflows of 2009 was not to be expected." In 2009, institutional investors put €5.6bn into Spezialfonds - the third-highest figure in their history. For 2010, the BVI recorded inflows of €1.7bn, and the first five months of 2011 generated approximately €800m.

In total, assets in Spezialfonds increased by 5.2% over the past year, bringing them to just over €30bn. This does not include shares that institutional investors might hold in mutual funds open to the public.

German open-ended funds (GOEFs) or publikumsfonds received less institutional money over the past two years, but in absolute terms they are still much larger than Spezialfonds, with around €86bn assets under management.

In the past few years the type of investors in Spezialfonds has been consolidated. Banking institutions are gaining in importance, albeit on a low level and slowly. "The second statistically significant trend is the growth of pension funds," Entzian says. This group of investors is eating into the share of insurers, which remains the largest investors in Spezialfonds.

However, Entzian explains that it can be difficult to differentiate between pension funds and insurers, since some retirement vehicles are still being counted as the latter. Entzian says this overlap is being addressed.

The changes to the regulations for GOEFs have triggered a debate in Germany on where the institutional money will flow.

Many GOEFs suffered liquidity issues when large investors withdrew their holdings over a short period of time in the wake of the financial crisis, and the government has since amended the law governing these vehicles. It introduced a minimum 12-month holding period for larger investments, thus keeping daily liquidity for private investors but effectively making GOEFs illiquid for institutional investors.

On the one hand, Claudia Reich Floyd, real estate securities fund manager at the Swiss 4IP Management, says Spezialfonds are too similar to closed funds and lack enough liquidity to be a good alternative. "Real estate equity funds investing in listed REITs, which have so far received little attention in Germany, are the much better alternative," she says.

On the other hand, a survey by Schroder Property of 112 German institutional investors showed that 65% of respondents were invested in GOEFs, but only 33% were planning to make further investments over the next year. Additionally, 41% said they were planning to move into Spezialfonds, while only 35% are currently doing so.

And Iryna Pylypchuk, CBRE's associate director of EMEA research and consulting, says Spezialfonds are profiting from this. She thinks Spezialfonds - despite being smaller vehicles of only a few hundred million euros - are now likely to get bigger.

"Alongside launches of smaller Spezialfonds - solely focused on particular markets, such as the Austrian market or the German office market, for example - larger vehicles are likely to emerge as well," she says.

Meanwhile, several new Spezialfonds have been launched. Union Investment has set up a €750m fund targeting retail outlets, while Henderson Global Investors has made its first foray into Spezialfonds (outside its Warburg-Henderson joint venture) with a €300m vehicle.

According to the Kandlbinder report, IVG remains the largest real estate company in this sector, managing net assets of €7.3bn in 34 Spezialfonds. However, in 2010 outflows from these vehicles was 2.7%. The second largest outflow was 1.6% at iii-investments.
While inflows for all other companies are negligible, RREEF Spezialinvest gained 1.3%, improving its market share by 1.5% to almost 6%, managing €1.8bn in total in nine Spezialfonds.