EUROPE - Less investment activity on the part of German open-ended funds (GOEFs) would effectively level the playing field for other institutional investors in the European real estate markets, according to Invesco Real Estate.

In a new research report, the fund manager said GOEFs had played an important role in price setting across Europe in recent years, appearing to be more aggressive on deals than other investors because they have been able to underwrite assets using income return targets rather than total return ones.

Regulatory proposals for minimum holding periods and withdrawal notice periods, as well holding assets at a 10% discount to value on companies' balance sheets, prompted significant outflows of capital from GOEFs.

Whether these proposals will become law is unclear, but there are fears the incoming regulatory changes could bring about a long-term reduction in assets under management and investment appetite at GOEFs.

Invesco also said current withdrawals and limited new inflows over the coming months, while the new proposals are debated, mean GOEFs are likely to be less active in

European markets for the time being.
The report said this would therefore "level the playing field for other institutional investors".

It also predicted that the size of the GOEF universe would shrink in the coming years, with a number of the struggling funds closing and disposing of their real estate assets.

The report said the GOEFs that survived would be those with significant distribution capabilities and a larger proportion of "inactive clients", such as institutional investors that take a longer-term view than retail or "money-market-style" investors.

Invesco found that three companies, running eight funds between them, dominated close to 50% of the GOEF market.

The balance is made up by a further 32 funds, some of which are diversified and some sector specific.

The report predicted the German market would begin to resemble those in the UK and US, where there is "a continued dominance of large diversified funds", with the continued presence of smaller specialist funds.

There is also the potential risk that the withdrawal of GOEF capital from the market could trigger a decrease in pricing as demand for real estate declines.

However, Invesco's research team said it did not expect this scenario, given the "ongoing imbalance" between the supply of stock and the demand for core real estate investment products from both domestic and international investors.

But the company did identify a potential opportunity for cross-border investment into Germany, given that GOEFs have been one of the dominant investors in their home market and often "priced other domestic and international capital sources out of the local market".