German funds re-live redemption nightmare

Germany's open-ended funds are getting an unwelcome blast from the past. As turbulence in global financial markets intensifies, some funds are starting to halt redemptions following panic withdrawals, in a scenario that is eerily reminiscent of the mass withdrawals from the country's open-ended funds at the end of 2005 into 2006.

Within the past week, twelve German open-ended funds have halted redemptions, citing market turbulence and runs on other funds for the temporary freezes. These twelve funds account for 38% of the total assets under management on the part of Germany's 43 open-ended funds, or EUR 34 bn of the EUR 89 bn total as of 30 September, according to Frank Bock, spokesman for the BVI Bundesverband Investment und Asset Management, which represents the German investment and asset management industry. The BVI will not publish figures for October outflows until November, said Bock

On Friday, DEGI Deutsche Gesellschaft für Immobilienfonds, a unit of Aberdeen Property Investors, suspended redemptions for both its DEGI Europe and DEGI International funds for three months. DEGI Europe had EUR 1.68bn of assets under management on 30 October, with DEGI International holding EUR2.5bn of assets under management, according to spokesman Dietmar Müller. The suspension came just hours after UBS halted redemptions from its Euroinvest Immobilien und UBS 3 Kontinente Immobilien for six months and Catella froze redemptions from its Focus Nordic Cities for three months.

Earlier in the week, there were also some big suspensions. On Thursday, Morgan Stanley Real Estate suspended redemptions in its open-ended P2 Value fund - which invests in core properties in Europe, Asia and North America - for three months. Morgan Stanley attributed the freeze on withdrawals in the EUR2 bn fund to ‘significant redemptions, particularly in the past two days, due to the extraordinary market environment and the recent suspension of redemptions by other open-ended property funds, resulting in the fund's liquidity ratio reaching the statutory minimum of five percent’. No new units will be issued until mid-November.

'I was surprised by market events this week,' said Walter Klug, a member of the board of Morgan Stanley Real Estate Investment GmbH, based in Frankfurt. 'Freezing redemptions was a direct result of the climate this week.' He declined to comment on whether the freeze on withdrawals would affect the fund's acquisition activity.

In the same week, SEB Asset Management suspended redemptions from its ImmoInvest fund, which invests in both major European and international cities, for three months. The EUR 6. 3 bn fund has seen around 10% in outflows since mid-September, according to Barbara Knoflach, managing director of SEB Immobilien-Investment. The fund is still open to making new acquisitions, depending on market sentiment, she said. For now, SEB's two other open-ended property funds, which are largely for institutional investors, remain open, she added. She could not rule out that they might also suspend redemptions: 'You can't really rule out anything in this climate,' she said.

Also last week, KanAm halted redemptions for three months from its EUR 5 bn KanAm grundinvest fund, just a day after halting redemptions from its dollar-denominated US-grundinvest fund. AXA also suspended redemptions from its Immoselect fund last week after it suffered EUR 420 mln in outflows in the past month.

Union Investment is one of the few managers of major German open-ended funds not to have imposed a freeze on redemptions in recent days. Union Investment's Fabian Hellbusch said that Union Investment does not see the need to suspend redemptions at the moment as its open-ended fund vehicles have very good liquidity. He noted that investors in general are a 'bit nervous' but Union Investment has not experienced the high rate of withdrawals of institutional money in recent days comparable to the situation at other German fund managers.

While Union Investment remains cautious it is still looking for investment opportunities from the viewpoint of a long-term investor. 'UniImmo: Deutschland has a liquidity ratio of 40% equating to EUR 1 bn, so we can still operate and invest,' Hellbusch said.


'I don't think this is over yet, although it’s too early to tell how high outflows are likely to be, or if they could exceed the outflows we witnessed in 2006. Nevertheless, since Chancellor Merkel guaranteed deposits in private savings accounts, it is clear that some investors are looking to reduce their exposure to investments, such as funds, that do not benefit from the same guarantee,' said Timo Tschammler, managing director of international investment at DTZ in London.

As such, the German government's decision on October 5 to guarantee bank deposits as part of its strategy to deal with the global banking crisis, could lead to further withdrawals from property funds, Tschammler said.

Freezing redemptions is also likely to put the brakes on acquisition activity on the part of Germany’s open-ended funds. ‘I do expect this to be an ongoing process, which will affect other open-ended funds as well. Unfortunately I fear that we won't see these funds as the main buyers over the next couple of months,’ said Christian Ulbrich, chief executive of Jones Lang LaSalle in Germany.

Still, Germany’s property funds know the drill: they’ve been here before. In 2005 and 2006, the sector was rocked by valuation scandals, which prompted billions of euros in withdrawals from what was then 35 open-ended funds, forcing many fund managers to temporarily freeze them. In January 2006, when outflows were particularly bad, investors withdrew a colossal EUR 4.2 bn in just one month, according to the BVI.

KanAm and Deutsche Bank were among the fund mangers to halt redemptions in 2006. Then, KanAm was forced to close its US-grundinvest fund after investors pulled about $50 mln out of the $579 mln fund over a few days because they were nervous after a German ratings agency cut the fund to 'sell' due to its investments with troubled US real-estate investment trust Mills Corp.

However, this time around, the backdrop is much gloomier. There is great instability in global markets amid fears of a looming global recession. This is in sharp contrast to 2006, when Germany had started to pull out of a prolonged recession and European property markets were booming. Given how much more difficult it is in the current climate to raise capital, Germany’s open-ended funds could be in for a rough ride when they re-open.
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PropertyEU Magazine

* In an interview with PropertyEU prior to the halt on redemptions, Walter Klug said Morgan Stanley's open-ended P2 Value fund will invest around $1 bn (EUR 804 mln) in property globally over the next 12 months.

'The current climate has definitely affected out investment strategy. We are very interested in markets like the UK and the US, where there has been the most price movement because we think they offer the best opportunities. That said, we are also looking to invest more in Asia,' he said.

The full interview will be published in the November edition of PropertyEU Magazine. Click on the link below to subscribe