German house prices are on the up as demand outpaces supply, yet new funds are still being launched. Barbara Ottawa wonders whether this might indicate a bubble.

House prices in Germany are on the rise, and demand, at least in the core segment, has long outgrown supply – but still new funds are being launched in expectation of their imminent demise.

"I fear a bubble might be emerging," Allianz board member Maximilian Zimmerer told the German daily Süddeutsche Zeitung in October. Those were quite strong words in a market that has been deemed reasonable and less prone to exaggerations for a long time.

In June, the government refuted the existence of a bubble in the German housing market despite the strongest price increase in decades burdening cities such as Munich or even Berlin.

Two months later, HSH Nordbank quoted a study by the Hamburgische WeltWirtschaftsinstitut (HWWI) saying that property prices were below the level of 1995 adjusted for inflation, while acknowledging some "speculative exaggerations" in very sought-after areas.

And investors have noticed a tightening of the market for some time, which Daniel Just, head of asset management at the €53bn Bayerische Versorgungskammer (BVK), confirmed to IPE in March. He said he had "lost appetite" for most real estate investments, as prices had "rallied extremely" in certain sectors.

Patrizia noted a "lack of investment opportunities" in the retail space in its latest report on this sector in Germany in June.

Rating agency Scope Analysis had already spoken of "unattractive prices" in some German market segments in 2011, and this is now causing problems for the dozens of former German open-ended real estate funds (GOEFs) that had to close in the wake of the crisis. According to Scope, many of them are behind schedule in their liquidations due to a "lack of sales".

However, despite these uncertainties in the market, dozens of new open-ended Spezialfonds and even one GOEF have been issued this year.

This 'gold rush' is mainly driven by an increasing demand for these vehicles specifically tailored to German institutional investors' needs, but the timing is determined by government plans to alter the existing regulations.

In its draft for implementing the European Alternative Investment Fund Managers (AIFM) Directive, the German government might have overshot its aim. The authorities had planned to scrap both GOEFs and open-ended real estate Spezialfonds altogether, triggering protest from the industry and causing the government to promise a review of its plans.

But the damage was done, and issuers are now struggling to get their products into the market, as the draft bill had guaranteed protection for existing vehicles.

And, of course, there is the indirect threat to the 'Kapitalanlagegesellschaft' (KAG) business model, which rises and falls with the Spezialfonds, as the law requires this vehicle to be issued by KAGs – which might not be a condition for any successor funds created under a new law. 

Investors are similarly keen to get their money in Spezialfonds. Real estate company Beos, for example, closed its second German corporate property fund 50% beyond the original target. The company confirmed there were enough investors on a waiting list to maybe raise capital in the fund at a later stage or indeed launch a third fund.

Of course, not all of the new Spezialfonds are investing in Germany, but those that do are trying to find niches in an already overcrowded market.

Art-Invest Real Estate Fund, for instance, set up a vehicle investing "anti-cyclically in office and commercial buildings with opportunities to add value in good locations in Germany".

ZBI Zentral Boden Immobilien AG and Deutsche Investment Kapitalanlagegesellschaft joined forces to issue a residential property Spezialfonds focusing on Munich and Berlin.

Henderson Global Investors announced that it collected €90m for its German logistics fund issued together with logistics specialist Palmira Capital Partners.

"All of this cannot be sustainable," an institutional investor told IPE at a pension fund conference. He fears that a bubble, if it is not already in the making, might be fuelled by this "hype".