German institutional investors are poised to invest around €100 bn in master KVGs in the next two-to-three years as interest in the ‘master fund solution’ intensifies, according to Alexander Tannenbaum, managing director of Frankfurt-based investment manager Universal Investment’s real estate arm.
German institutional investors are poised to invest around €100 bn in master KVGs in the next two-to-three years as interest in the ‘master fund solution’ intensifies, according to Alexander Tannenbaum, managing director of Frankfurt-based investment manager Universal Investment’s real estate arm.
‘More than €800 bn - or 70% - of assets held in institutional special securities funds in Germany today are run via master KVGs,’ Tannenbaum told PropertyEU. ‘This has grown by more than €100 bn in the past two years and could grow in a similar way in the next two-to-three years.’
A KVG is a German regulated capital management company (Kapitalverwaltungsgesellschaft), formerly known as a Kapitalanlagegesellschaft (KAG). It typically takes the role of the alternative investment fund manager (AIFM) or the fund manager. As such, a KVG is essentially a fund administration platform. Spezialfonds also fall under the umbrella of KVGs. German players active in the KVG space include Allianz Global Investors, Union Investment, Helaba and Universal Investment.
From an institutional investor’s perspective, a master KVG is a very efficient way to consolidate all or a large part of its investment. The investment strategy can be tailored to suit the investor’s needs, including investing in special alternative investment funds which give an investor access to asset classes that might not be available to them otherwise.
‘I think investors will increase their exposure to master KVGs going forward, which will have a positive impact on the real estate sector because of the investor-friendly structure,’ said Tannenbaum.
Separation of functions
Another advantage of a master KVG is that it allows for the separation of the administration and the asset management functions, unlike a regular Spezialfonds managed by a KVG which provides administration and asset management services. Focused on real estate funds, the master KVG legally owns the properties and all of the real estate assets can be bundled into it. The other advantage is bilateral control – the KVG controls the asset managers and vice versa, which appeals to many investors because it improves transparency.
Universal Investment provides administration services for KVGs and has several different asset managers working on any given master fund structure. ‘On our real estate platform, we work with 16 asset managers at present,’ said Tannenbaum. ‘Although master funds are quite new for the real estate sector, we’d like to capture a 10% slice of Germany’s €43 bn real estate Spezialfonds sector.’
KVGs are also ‘very important’ to German fund manager Union Investment, according to
Christoph Schumacher, managing director at Union Investment Institutional Property. Union Investment runs two real estate KVGs – Union Investment Real Estate and Union Investment Institutional Property. It uses both platforms for its open-ended funds for retail and institutional clients (Spezialfonds/Sondervermögen).
‘The AIFM and KAGW regulation that was introduced in July last year (which stipulates, among other things, that investors have to wait 12 months before making redemptions from a fund) has played an important role for investors,’ said Schumacher. ‘They like KVGs because they represent a stable, recognized platform in Germany. Core investors typically have an expectation of current cash flows of about 4% although low bond yields are also causing investors to have more modest expectations from real estate. The pressure on pricing is immense.’
Residential investments
Many German investors are also keen to increase their allocation to residential properties and that can be done via master KVGs. According to Universal Investment’s second annual survey of German institutional investors published in November, investors have signalled their interest in increasing their residential allocation to 21%, up from 19%.
‘Residential property is a growing trend offering a stable return, especially for German investors who know the local markets,’ said Tannenbaum. ‘Asian investors are also showing increased interest in Germany’s residential sector because of the stable cash flow.’
In total, 40% of the investors surveyed said they plan to use the master KVG structure as a platform for real estate investments. Those surveyed also said they expect a modest hurdle rate of 4.3%, an expectation that Tannenbaum deems ‘realistic’.
AIFMD regulations
However, obtaining the AIFMD licence enabling a KVG to launch new funds was ‘a tough job’, according to Tannenbaum, not least because the licence application comprised around 25,000 pages. ‘Meeting the higher regulation requirements means investments in expertise and technology, but overall, the AIFMD and other regulation projects are a business opportunity for master KVGs because institutional investors are looking for regulated platforms to help them to fulfill regulation requirements,’ said Tannenbaum.
Universal Investment has around €235 bn of AUM across funds, securities, real estate and alternative asset classes. Of the total, around €155 bn is invested in real estate and securities.
Sara Seddon Kilbinger
Correspondent German-speaking countries
For more on the prospects for the German market, see the article and video presentation from the Outlook 2015: Europe & Germany investment briefing.