Henning Klöppelt highlights the benefits of investing via spezialfonds and looks at why the German vehicle is beginning to hold its own internationally
 








Henning
Klöppelt is managing director at Warburg-Henderson

Currently, the German special property fund, or spezialfond, is enjoying a renaissance among German institutional investors. The new German Investment Law, which came into effect on 1 January 2007, has already had an impact: according to a recent survey carried out by rating agency Feri EuroRating Services, around one quarter (24.5%) of the €70bn invested by a sample of 150 institutional investors in Germany was made up of spezialfonds at the end of 2008. In 2006, the market share of spezialfonds among the polled investors was just 19.4%.

During the same time span, from 2006 to 2008, SICAV (societe d'investissement a capitale variable), FCP (fonds commun de placement) and other foreign vehicles were able to increase their market share in Germany only marginally from 6% to 6.1%.

These figures show that the new amendment to the investment law in 2007 was a groundbreaking decision. The extensive liberalisation strengthened the spezialfond on the domestic market, giving investors wide latitude for their investments. As a result, the spezialfond has also become popular internationally.

Compared with other international vehicles - including the FCP and SICAV, and also the JPUT (Jersey property unit trust) and REIT (real estate investment trust) - the spezialfond is more than holding its own. The vehicle can now extend the sharp upturn it has taken in Germany during recent years towards the international stage. The total fund volume to date of more than €22bn shows the high acceptance of the vehicle among institutional investors, most of whom are based in Germany.

Key points of the reform of the investment law regarding special property funds are the increasing liberalisation and the option to invest in multi-level real estate companies. Almost all investment terms can now be determined individually. In addition, funds can also acquire holding companies provided  these hold 100% of their subsidiaries. Furthermore, the fund can be invested in real estate companies up to 100% as long as it acquires 100% of the respective company's shares. Minority stakes are allowed up to the limit of 30% of the fund's total volume.

The new legal situation is a milestone in the realisation of flexible investment strategies, even though the legislators have left some scope for the future:
in the long-term, majority and minority stakes of holdings and real estate companies should be allowed without limitations. Holding structures have become increasingly important in international business, since they provide considerable latitude for all forms of tax optimisation.

Many project developers now prefer holding structures. Some countries, such as Russia or Japan, allow foreigners to purchase property only in the form of these legal constructions. In addition, the new German investment law restricts the securitised financing of property via outside capital to 50%. However, German legislators have now removed all constraints on unsecured borrowing, which means that funds can actually raise their debt quota above the 50% limit.

It is unclear why the securitisation of shareholder debts was not relinquished, even though all parties involved knew that this was a flaw in the original investment law. It remains the intention of the German legislators that shareholders' debts should be secured according to standard banking practice, although they can be classified as part of the equity capital. This legal arrangement unnecessarily constrains debt financing, and I am sure it will soon be a thing of the past.

The amendment to the investment law is a step in the right direction. After one year, it is obvious the improvements have further strengthened the vehicle. However, even before the change to the law was made, the spezialfond already had a strong reputation, which had been unintentionally eclipsed by the discussion about its restrictions.

So why do German investors favour this vehicle? Since German legislation guarantees a high minimum standard for the product, the contractual framework itself is not complex, but rather transparent, which makes it easier to handle for the client. The organisational effort required from the investor is comparatively low. In comparison to international standards, the spezialfond has excellent reporting procedures.

Furthermore, fund administration stands out due to a comparatively high standard. Beyond this, German legislation requires that the price per share is calculated anew each month. Another important point is that tax-exempt pension funds and insurance companies are not only looking for maximum yields.

They appreciate the safety of the investment and the regular cash flow, both established in the mandatory risk diversification of the product. In contrast, tax-optimised high-end solutions, such as an FCP, carry a high structural risk - if tax legislation changes, predicted yields may no longer be realised. Investors in spezialfonds by contrast can make comparatively safe calculations.

The greatest entrance barrier for foreign investors to the German spezialfond is the need to explain what is meant by the term Immobiliensondervermögen (real estate funds). However, it is precisely the simple process of buying unit certificates that is one of the main reasons for the promising future of the product.

International asset managers and investors benefit from the German vehicle by easily gaining access to German pension funds and insurance companies and thereby to one of Europe's largest real estate capital markets. International players can use the advantages of the spezialfond as a vehicle that is accepted by German institutional investors. We meet the international demand here via our subsidiary, which was explicitly founded for this purpose.

The principle is simple: the asset manager initiates the spezialfond, while we, as a capital investment company, provide the legal and administrative framework. In the coming months, investors and real estate companies from several European countries will have the opportunity to convince themselves of the performance of the German vehicle.

Bundesverband Investment und Asset Management (BVI), the German association of investment and asset management companies, is holding a roadshow dedicated to this topic, which will start in the Netherlands in April and continue in several of Europe's major cities. Warburg-Henderson will be participating in the event, as we are convinced the German spezialfond has a bright future.