German open-ended funds halt spending spree

German open-ended funds have put their buying activities on hold in the wake of the funds' recent mass redemptions, according to a new report from Jones Lang LaSalle. Open-ended funds, particularly German players, have been one of the few remaining buyers of global property this year.

While German funds can remain frozen for two years, liquidation of assets may become necessary if the pressure to redeem units continues, the report noted. In the first three months of suspension, funds are allowed to sell properties only at book value, and after that at a loss. A similar liquidity crisis in unlisted funds occurred in 1991 in Australia and was a significant factor in the crash that saw the value of Australian office property fall by nearly 50% between 1990 and 1993. Increasing financial pressures have caused a number of German funds and four Australia-managed investment funds to close.

Anecdotal evidence indicates there are currently 15 open-ended funds, out of about 40, reporting daily to Bafin, Germany's Financial Supervisory Authority. The requirement to report to Bafin happens when the funds have below 10% liquidity, when by law they need 5% liquidity. In the US, the Federal Reserve announced the creation of the Money Market Investor Funding Facility (MMIFF) to aid money market mutual funds and other investors who have had difficulty selling assets to satisfy redemption requests. This particular measure is only of benefit to money market-related funds, but could relieve some pressure on asset sales to meet redemption requests.

Although restrictions on redemptions should help to relieve the immediate need for open-ended and unlisted funds to liquidate property assets, these funds will come under increasing pressure to sell if investors continue to redeem units, the report concluded. This may push more institutions into the distressed category, forcing an end to the 2008 vendor/purchaser standoff.