Daniel Piazolo and Sebastian Gläsner investigate the investment performance of Spezialfonds. Did they outperform open-ended public funds?

Any analysis of the scale, investment activity and performance of German real estate Spezialfonds needs to be placed in a wider context. The market of German property funds that revalue their real estate assets at least once a year can be subdivided by their legal structure into listed property companies, listed real estate investment trusts (REITs), open-ended public funds and open-ended Spezialfonds.

The first two groups measured by the EPRA/NAREIT Germany index comprise 11 vehicles with an aggregated net asset value (NAV) of €5.3bn (at December 2011). Open-ended public funds entail 53 funds with €86bn (at October 2011) and Spezialfonds account for €32.2bn in 169 vehicles (at October 2011). Institutional open-ended public funds in Germany outperformed their Spezialfonds counterparts between 2006 and 2009, according to IPD data. Daniel Piazolo and Sebastian Gläsner drill down into the numbers.

Unlike most other developed real estate markets, the German market is dominated by open-ended funds and their investment performance is measured on an NAV basis, and not determined by the law of supply and demand as in the case of listed REITs and listed property companies. With an aggregated NAV of €118.2bn, open-ended funds exceed the investment volume of the listed sector by more than 22 times. Investment Property Databank (IPD) analyses the performance of both the open-ended public funds and the open-ended Spezialfonds in two annual studies. Besides this, IPD publishes the IPD German Open Ended Funds index (OFIX) on a monthly basis and the IPD Spezialfonds Real Estate index (SFIX) annually.

The universe of the 53 open-ended public funds is heterogeneous, with only 22 of the funds open to private investors. The remaining funds are either not accessible to private investors, due to the articles of incorporation of these funds, or are out of reach for small-scale investors due to their high minimum investment thresholds. IPD reflects this fact in its OFIX index; it includes only those funds that are open to private investors (table 1). Consequently, some open-ended public funds have an institutional investment character, and are comparable to the open-ended Spezialfonds.

Therefore, three groups of open-ended real estate funds under German investment law can be distinguished. The first group consists of 22 public funds that are open to private investors, with a total NAV of €75bn, and contains the largest open-ended funds. With the monthly publication of the OFIX index and the sub-indices OFIX Germany, OFIX Europe and OFIX Global, IPD covers 100% of this market, for which it provides timely and relevant performance benchmarks.

The second group - the real estate Spezialfonds - comprises 169 funds worth more than €30bn and is covered by the annually-published IPD German Institutional Real Estate Funds Study and SFIX. As an innovation, IPD broadens its analyses on a third group, namely the open-ended public funds with special fund characteristics, the institutional public funds.

In contrast to the volatility in the growth of the group of public funds for private investors, the subset of institutional public funds showed much more stable growth. At the end of June 2011, institutional public funds, with a volume of €11bn, represented an important alternative for institutional investors to the Spezialfonds, which have a value of approximately €30bn. In relation to public funds for private investors, the OFIX index covers 100% of the market; the Spezialfonds index SFIX has a market coverage of about 37% in the current year, and the new index of institutional public funds covers 86% of the group.

Only six of the 22 investment companies in the open-ended fund market offer all three types of funds. All but two investment companies with public funds offer Spezialfonds, and, among the 11 providers of institutional public funds, eight are also active in the retail business with public funds for private investors.

The market leaders for private investor funds, based on fund volume, are: DekaBank with 25.5%; Union Investment with 21.9%, and Commerz Real with 13.5%.

For institutional public funds, five investment companies - Aachener Grundvermögen, DekaBank, SEB, UBS and Union Investment - are of similar scale, with fund volumes of more than €1bn; UBS leads with one €2.1bn fund. Warburg-Henderson, with five funds averaging €100m in volume, has launched the largest number of funds.

For Spezialfonds, IVG Institutional Funds is the unchallenged market leader with 23.2%, followed by the Internationales Immobilien Institut (iii) with 9.7%, and Patrizia, which took over the LB Immo Invest, with a 6.8% market share.

Asset allocation by geography
For both groups of funds, Spezialfonds and public funds for private investors (OFIX), differences in regional asset allocation are significant. However, the two groups of funds available to institutional investors share strong similarities in their regional asset allocation. Both the Spezialfonds and the institutional public funds have approximately 40% of their investments (by market value) in Germany. If the rest of the euro area is included, about 80% of investment is accounted for. There is a slight difference between the two groups: the Spezialfonds have approximately two percentage points more investments in Germany, while the institutional public funds, conversely, have a higher weighting outside the euro area.

Spezialfonds have €6.4bn of investments in Germany and €8.2bn in 16 other countries. The institutional public funds have invested €5bn in German properties and €7.4bn in 26 other countries. Ranking the investment locations of the two groups, the first four positions are identical, and there are only two differences in the top 10. For Spezialfonds, Austria and Finland are among the top locations, whereas Poland and Luxembourg are popular with institutional public funds.

For Spezialfonds, the two heavyweights of the EU - France and the UK - together with the Netherlands account for 60% of the market value of the foreign investments, while institutional public funds have an even greater focus on France, which accounts for 26% of all foreign investments. With the exception of Denmark and Switzerland, the Spezialfonds are invested in all of Germany's neighbouring countries. The most common investment location for the investment companies after Germany is the Netherlands, where five investment companies have invested, followed by Belgium, France and the UK, each with four investment companies.

Investment performance
The focus of IPD's analysis on Spezialfonds is their investment returns, their distribution and an analysis of factors that lie behind the returns. At the highest level of aggregation, the SFIX index provides a benchmark of all analysed Spezialfonds. In comparing fund indices for Spezialfonds (SFIX) and public funds for private investors (OFIX) with the German property index DIX, it is to be noted that SFIX and OFIX portray fund performance, while DIX measures the real estate return. In addition, the funds covered by OFIX and SFIX have invested significantly in foreign assets.

Nevertheless, a relatively stable trend can be observed in the period up to 2008, with the two fund indices performing significantly better than the German Real Estate index DIX. In 2008 there was a sharp drop in the Spezialfonds return, followed by a record low of 0.5% in 2009. The returns of public funds in 2009 were at a similar level to German direct investments, only to reach a record low of 0% in 2010. The 2010 return on the Spezialfonds of 1.6% was well below the long-term average for this group, but at least the downward trend of 2008 and 2009 seemed to have been broken.

Annualised over the whole period from 2001 to 2010, the SFIX achieved an aggregate fund return of 3.7% per year, 0.2 percentage points above the OFIX index.

Because the sample of institutional public funds has only recently become large enough for an index, the comparison of these funds with the Spezialfonds and the public funds for private investors begins in 2006. From 2006 to 2009 the performance of institutional public funds exceeded the performance of the special funds by 1.5 percentage points per year; it was only lower in 2010 (by 0.3 percentage points). Annualised over the past five years, institutional public funds have outperformed Spezialfonds by 1.6 percentage points. For more than five years public funds for private investors have been virtually on a par with Spezialfonds; the main difference was the earlier collapse of Spezialfonds returns in 2009, with public fund returns collapsing in 2010.

Due to the extensive disclosure requirements of both public fund groups, it is, in contrast to the case of the Spezialfonds, possible to calculate a monthly index. The monthly analysis not only shows the higher returns of the institutional public funds from 2006 to 2008, but also the fact that the institutional public funds have tended to lead the public funds for private investors in terms of their yearly performance pattern. The boom of 2006 and 2007 peaked for the institutional funds in August 2007 - with an annual return of 10.2% - whereas the peak for private investors came in January 2008.

A similar picture can be seen for the low points of both indices: the institutional funds recorded a relatively continuous decline in returns until February 2010 and, since then, have achieved annual returns of approximately 2%. The funds for private investors, however, achieved their most recent low point in March 2011, although from subsequent movements in the index it cannot be clearly determined whether this represented a true turning point.

In contrast to the volatile cash flows of funds open to private investors, both Spezialfonds and institutional public funds reported a constant upward trend and now have a combined net asset volume more than €40bn. The IPD fund universe describes the performance the current 67 funds with a fund volume of €20.1bn and an investment value of €27bn.

As already stated, both groups of institutional funds have about 40% of their investments in Germany, 40% in the rest of the euro-zone and 20% elsewhere. Funds focused on Germany have shown more stable performance over time than funds focused on the euro-zone, or global funds. However, the spread of the returns is very high, both on a one and a five-year basis. This applies to the total sample of funds as well as to regional sub-groups.