Germany set to reform open-ended property funds

The structure of Germany's open-ended property funds is set to change radically in the wake of a draft bill submitted by the German finance ministry to reform the investment act which currently regulates the criteria of this type of fund. Under the new legislation existing open-ended property funds will be given three years to implement the new regulations, while capital investment companies may launch funds in line with the new criteria from July 1, 2007.

The major changes in the legislation revolve around the division of open-ended property funds into two classes: yield-oriented funds with a focus on growth and the so-called safety-oriented or low-risk funds.

Under the new regulations, the safety-oriented funds will only be allowed to invest in certain areas, for instance the EU, Switzerland, the US, Canada, and Japan, while investments in Latin America and China will no longer be permitted. Up to now, open-ended property funds in Germany were able to invest worldwide, provided the foreign currency risk did not exceed 30%. The new regulation will also limit the foreign currency risk (without currency hedging) to 15% and the outside capital quota to 30% for safety-oriented funds. Currently the highest permissible outside capital quota is 50%. This will remain the level for yield-oriented funds.

Safety-oriented funds will continue to be obliged to offer share redemption on a daily basis, but yield-oriented funds will have the option to waive daily share redemption.

Under the bill, project development risks will be curtailed, with portfolio and project developments no longer allowed to exceed a 15% and a 5% share respectively for the yield-oriented and the safety-oriented funds.

In a performance ranking of open-ended property funds by German newspaper Die Welt, Grundbesitz-global topped the list in 2006 with 7.9%, followed by KanAm US-grundinvest at 7.4%. Morgan Stanley P2 Value and DekaImmobilien Global followed with 5.9%.