The construction crisis hits real estate funds. The slump in orders and several insolvencies of real estate developers and builders are frightening investors who have so far invested less than half as much money in real estate funds this year as in the comparable period last year. According to the rating agency Scope, the industry association BVI and the financial analyst Peter Barkow, there is no danger of a short-term flight of investors. A notice period of one year also applies to so-called open funds.
“Currently, at least a significant slowdown in the inflow of funds can be observed,” says Barkow, founder and head of the consulting firm Barkow Consulting. “In the first half of the year, they fell by 60 percent compared to the previous year. These are also the lowest inflows in a first half of the year since 2011, and back then there was no notice period.”
The bankruptcy of the Nuremberg real estate developer Project Immobilien recently raised concerns. The non-insolvent investment branch of the group of companies collected the money for the construction projects by issuing funds: a total of 1.4 billion euros, subscribed by over 32,000 investors.
Insolvencies in this business can have far-reaching negative consequences: investors lose money, buyers are faced with unfinished buildings, construction companies are left with unpaid bills.
Significant return generated
In the years of low interest rates, real estate funds were popular because they generated significant returns. Accordingly, from 2012 to the end of June this year, real estate special funds for institutional investors increased the net value of the invested assets by 371 percent to 176 billion euros, as Barkow says with reference to raw data from the Bundesbank.
Public funds – in which anyone with sufficient financial resources can participate – grew within these eleven and a half years by 58 percent to 132 billion.
A distinction is made between open and closed funds. Closed does not mean that the relevant fund has ceased operations and closed its doors, but that investors cannot redeem shares once purchased.
In the case of “open-ended” funds, on the other hand, investors can opt out, but only after the one-year notice period. Before that, they have to hold the shares for at least two years after the purchase, as a spokesman for the Federal Fund Association BVI explains.
Investor retreat during the financial crisis
“The regulator reacted to the effects of the financial crisis with these regulations in order to achieve a stabilizing effect,” says Hosna Houbani, an analyst at the rating agency Scope, which specializes in real estate funds. Investors fled during the international financial crisis, after which regulation was tightened.
“Insolvencies that attract media attention at least do not lead to higher inflows of funds into real estate funds,” says finance expert Barkow. “But if investors want to return their shares, we won’t see that for another twelve months.”
Anyone who needs their money before the end of the one-year notice period “can sell shares in open-ended retail real estate funds on the stock exchange,” says the BVI spokesman. “The sale on the stock exchange is subject to a fee. “And the price of the share is – in contrast to the return to the fund company – dependent on supply and demand.”
Few signs of recovery
In the first half of the year, too, investors invested additional money in open-ended real estate funds: “The net inflow of funds has declined since 2019, but in the current year the inflows exceed the outflows as of June 30 by 1.2 billion euros.” , says analyst Houbani. However, this is far below the peak values of the recent past: According to Scope data, the record was set in 2019 with a net inflow of 10.1 billion euros, in 2022 it was 4.5 billion.
Currently there is little sign of an upswing in the real estate market. However, the business model of the insolvent Project Immobilien was an exception: the financing of residential buildings through funds is rather unusual. According to data from the industry association BVI, open-ended real estate funds mainly invest their investors’ money in commercial buildings: 55 percent in offices and medical practices, 22 percent in retail and gastronomy, and the rest is in hotels and warehouses, among other things. According to the BVI, residential buildings account for only four percent.
