Global Capital Markets
Newsletter
German Issue
October 2012
NEW AIFM REGULATION:
YET ANOTHER LAW TO SHAKE UP THE GERMAN REAL ESTATE FUND INDUSTRY
The German fund industry is divided in two: the haves
and have nots. But even those that have survived the
2008-2012 Financial Crisis will be confronted with new
legislative hurdles and will encounter increasingly nervous retail and institutional investors.
This Newsletter provides an overview of the current
state of the German fund industry and provides an outlook for the business, particularly taking into account
upcoming changes in legislation.
Current market condition for open-end (OIFs)
and closed-end funds (CEFs)
A quartet of DEKA, Union, RREEF and Commerz Real
report cash inflows or stable liquidity and seem to be
relatively unaffected by the financial turmoil. DEKA and
Table 1 - The Crisis of the Open End Funds
Closed
0.4
Degi German Business
0.3
SEB Immoinvest
CS Euroreal A
Kanam Grundinvest Fonds
Axa Immoselect
Degi International
Degi Europa
TMW Immobilien Weltfonds P
Morgan Stanley P2 Value
Axa Immosolutions
Degi Global Business
Kanam US Grundinvest
The syndication environment for closed-end real estate
funds (CEFs) is even more grim. The availability of equity for real estate investments in the first six months of
2012 was substantially lower than in the same period in
2011. Negative news from existing CEFs and syndicators
involving bankruptcies, repeated capital calls and losses
on foreign currency debt financing have diminished investor confidence in this product further.
Under Management in Euros (billions)
UBS (D) 3 Sector Real Estate Europe
Under Liquidation
Union in particular see strong demand from retail investors. On the other hand, 12 open-end funds with a
total investment volume of EUR 24bn have announced
their liquidation. Now, nearly 25% of current capital invested in all such funds will be liquidated over the next
four years. A quarter of all sponsors are affected by this
wave of liquidation. KanAm, Aberdeen, SEB, Credit Suisse and AXA and others are all in the process of selling
assets around the globe.
Under Management in Euros (billions)
6.3
6.1
4.0
2.5
1.6
0.9
0.7
0.7
0.4
0.3
0.2
Continued on following page
Re-opening Scheduled for....
October 6-12
November 29-12
Liquidation Until
April 30-17
April 30-17
December 31-16
October 20-14
October 15-14
September 30-13
May 31-14
September 30-13
May 11-15
June 30-14
March 31-12
Source: BVI
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The Avison Young Global Capital Markets Newsletter
October 2012
Even syndicators who have access
to debt and core real estate, report
a lack of investor demand for plain,
“vanilla-type” real estate. Syndication partners such as banks question the product or worse yet, are no
longer interested in acting as a sales
platform. The syndicators of CEFs
compete for business on two major
fronts: the buy and sell sides.
The reform of the German Investment Act in 2011 targetting OIFs had
barely been brought into law when
in June this year, the German Federal
Ministry of Finance (BMF) proposed
new rules and regulations. This initiative surfaced along with the soonto-be implemented European financial law known as the Alternative
Investment Fund Managers (“AIFM”)
legislation. The AIFM legislation is
scheduled to be passed in July 2013
and under the act, funds will be required to carry out more reporting,
risk management and capital standard procedures than ever before.
Such an increase in oversight will
undoubtedly lead to higher costs
and a more difficult operating environment for the fund industry as
a whole. The BMF have gone overboard by proposing even more restrictive rules and regulations.
Table 3 to the right lists the most important legal changes for OIFs and
CEFs proposed in the new legislation:
Consequences for sponsors
of CEFs
The proposed reforms will be a major concern to the real estate syndication business. Whereas the limit on
foreign currency debt could be seen
as a step to reduce risk, the other
proposed legislative changes will
make it extremely difficult for new
funds to compete.
Table 2 - CEF Equity Placements in Real Estate
Year/Location
2005
2006
2007
2008
2009
2010
2011
Q2 2012
Germany
1,211
1,814
1,107
827
785
1,127
1,595
731.2
Abroad
2,140
2,519
3,025
2,224
1,231
794
680
268.4
(Raised and invested equity CEFs in Billion EUR – Source: VGF 2012)
Table 3 - BMF proposal for AIFM Regulations
CEFs
OIFs
Single asset funds only available for
“experienced” clients and a minimum
investment of EUR 50,000
New funds would be restricted (retail
and institutional)
30% limit on Loan-to-Value on acquisition and during the holding period
Existing funds not in liquidation will
be “grand-fathered”
Yearly external valuation
30% limit on foreign currency financing
Products need to be approved by BMF
(minimum of 40 days approval process)
Most of the CEFs syndicated over the
last three decades were single-asset
funds with an average investment
of EUR 12,700 per investor. Given
the proposed legislation, such a low
level of investment will no longer be
permissible for new funds investing
in single assets. The multi-asset fund
requirement would force syndicators
to warehouse new acquisitions. This
will be a major challenge for syndicators but will be a requirement under
the new law in order to fulfill the approval process by the BMF.
The loan-to-value limit of 30% could
also be highly problematic. Given re-
cent cap rate compression, attractive
returns for core assets in major markets (typical playground for CEFs) are
mainly achievable if the loan-to-value ratio is 50% or higher, in order to
take advantage of today’s low-interest-rate environment.
No doubt, new industry standards
and regulations are appropriate in
order to increase transparency, reduce risk and ban suspect syndicators from the market. But with the
CEF-market already suffering from
reduced investor confidence, the
proposed regulations are certainly
not going to help the industry in the
short run.
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The Avison Young Global Capital Markets Newsletter
October 2012
Consequences for sponsors of OIFs
If the BMF implements the proposed new legislation,
sponsors will no longer be permitted to launch new
OIFs. It should be noted that this investment vehicle
currently comprises EUR 116bn in assets under management. Existing OIFs would benefit from an unlimited
grandfathering, but sponsors would not be permitted to
set up new funds. For retail investors, the diversified and
specialized OIFs would disappear, leaving them with the
sole opportunity to invest their capital with four players:
DEKA, Union, RREEF and Commerz Real.
This is particularly problematic for institutional investors such as pension funds and insurance groups who
started to invest in real estate through tailor-made OIFs,
as institutional investors are prohibited from investing
in CEFs. The institutional OIFs never suffered as badly as
the retail funds. Although the total size of these funds
(EUR 34bn) is approximately a third of retail OIFs, this
product type has been growing fast. The proposed legal
limitations would restrict sponsors and clients from investing in, and managing, such successful products.
For the sponsors, this dramatic change in legislation
could result in limited growth opportunities for retail
OIFs and a potential move to less regulated locations
such as Luxemburg and Ireland, as well as sustaining the
high costs to implement a new infrastructure to provide
institutional clients with alternative products.
Conclusions
The major shift in the German fund industry continues.
For decades, OIFs and CEFs have been a reliable product
for retail and institutional investors. Last year’s reform of
the Investment Act has already brought uncertainty for
OIF investors and is in part responsible for the wave of
fund closures and liquidations. Now, the proposed BMF
legislation will cause another round of uncertainty and
reluctance from investors to place capital in such products. This could be a chance for REITs that currently play
almost no role for German retail and institutional clients.
It is also a chance for foreign investors to enter the German market for core and trophy real estate. In the past,
these investor groups were not competitive for comparable product. Canadian buyers have taken advantage
of this situation and benefit from a low-interest-rate environment, a strong Canadian dollar and the availability
of core real estate. This trend is likely to continue in the
short to medium term.
The author worked for approximately
seven years with a major German
open- and closed-end real estate fund
syndicator and was responsible for
acquisitions and dispositions in North
America. In January 2011, he joined
Avison Young as European Investment
Manager. For more information, please
contact Udo Stöckl at 416.673.4019 or
[email protected].
The Avison Young Global Capital Markets Newsletter is designed to inform our clients of current global investment news
and developments that influence North American commercial real estate markets. This series of newsletters addresses
important regulatory and market changes affecting German
market participants.
Previous issues of our Global Capital Markets Newsletter are
available upon request.
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The information contained herein was obtained from sources deemed reliable and is believed to be
true; it has not been verified and as such, cannot be warranted nor form any part of any future contract.
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