GERMANY - Half of institutional investors currently invested in German open-ended property funds (GOEFs) plan to liquidate their holdings in the next month, according to a report by Schroder Property.

The survey of 112 German institutional investors - including pension funds, insurance companies, family offices and banks - showed that 65% of respondents were currently invested in GOEFs, but only 33% were planning to invest in the vehicles in the next 12 months.

The findings follow recent reforms of the German investment law that will impose minimum holding periods and redemption penalties on GOEFs, which are expected to favour the interests of private investors rather than institutional capital.

There has been speculation in Germany that these changes will prompt a greater number of institutional investors to divert capital to Spezialfonds, locally regulated real estate vehicles designed specifically for pension funds and insurance companies.

The survey provided evidence that Spezialfonds are becoming increasingly popular among institutional investors. The proportion of investors planning to invest in these vehicles over the next 12 months (41%) was higher than the proportion currently invested (35%).

The popularity of Luxembourg-domiciled fund structures FCP and SICAF among institutional investors in Germany has also continued, with 16% of respondents currently invested in these vehicles and 17% planning to allocate capital in the next 12 months.

Michael Ruhl, managing director of Schroder Property KAG, a company that manages Spezialfonds, said the new legislation was likely to result in significant long-term changes in the market, as German institutional investors shifted real estate investments into Spezialfonds and FCPs.

Ruhl added that, due to the substantial number of Spezialfonds in the market, investors will still be able to achieve diversification by selecting country or sector-specific vehicles.

"Smaller pension funds will be able to achieve the same effect through pan-European diversified funds," he said.

Direct property exposure among institutional investors looks set to fall among those institutional investors that invest in GOEFs, with 36% of respondents planning to make new direct investments in the next 12 months, compared with 42% with existing direct investments. 

But for those investors active in Spezialfonds the picture is more stable, with 50% looking to make new direct investments compared with 52% with existing investments.

"It is clear the size of direct holdings will remain constant, while indirect investments will be shifted to Spezialfonds and FCPs," Ruhl said.

Ruhl does not believe the German regulatory reforms will result in a flight from real estate (more than 40% of respondents invest 10% or more of their assets in real estate), but he does see many investors reassessing where and how they invest.

"Before the financial crisis, around 2006-07, there was much stronger interest in a worldwide diversification," he said.

"Of course, the crisis then showed us that a diversification toward Asia would not be able to reduce risk, causing investors to be more cautious when it came to investing in truly global funds."

Instead, Ruhl believes, investors will continue to strive for core investments, held either directly or through Spezialfonds - but not through GOEFs.