GERMAN OPEN-ENDED FUNDS
Liquidating funds with exposure to illiquid Dutch assets give worst returns, reports Lauren Parr
Investors in many of the 13 liquidated or liquidating German open-ended funds are out of pocket. What they thought was a low-risk, long-term investment has in some cases resulted in 25-35% cumulative losses, depending on when investments were made. The funds that had to liquidate soonest are the worst performers. Pramerica’s TMW and AXA Immoselect terminate in 2014 and have posted the worst total returns in the 12 months to the end of September 2013 in Citywire Global’s real estate funds benchmark index (see 2nd table).
Four open-ended funds must terminate next year, including Aberdeen’s Degi International and Degi Global Business; three in 2015; one in 2016; and two in 2017. Three are passed their termination dates, the largest being Degi Europa (see table). “The fact that these open-ended vehicles are in liquidation in itself tells you the story,” says CBRE researcher Iryna Pylypchuk.
With different liquidation periods, assets and wind-down strategies, it is hard to compare funds’ performance like for like, but generally, larger funds that have not had to sell into weak markets have a chance of making better distributions to investors.
CS Euroreal and SEB denied that they had to close until 2012, by which time things were significantly better in parts of the market, so these funds have an advantage.
Big-city assets drive outperformance
A fundamental factor driving performance is the location and quality of funds’ assets. Those with big German real estate exposure, like SEB ImmoInvest – 42% by country exposure, according to 2011 Morgan Stanley report, GOEFs: The Great Unwind – and to London and Paris are better placed to outperform other liquidating funds owing to the improvement in the German market and the strength of these capital cities.
SEB’s fund has sold 10 German offices and two hotels this year, including The Grand Hyatt and Maritim Hotel in Berlin. Since May 2010, 35 assets have been sold from its portfolio and since May 2012 €1.7bn has been paid to investors.
At the other end of the spectrum are those with heavy exposure to the Netherlands, where liquidity is low, such as Degi Europa, with 18% exposure. When Aberdeen failed to complete the fund’s liquidation process following the expiry of its three-year deadline this September, the fund passed on to its custodian bank, Commerzbank.
Aberdeen is advising Commerzbank on a sales strategy for seven remaining properties that could not be offloaded during the wind- down period. One is a hotel in Rotterdam with “asset management issues that must be solved first”, says Harmut Leser, chief executive of Aberdeen Asset Management.
Discounts on GOEFs’ Dutch asset sales averaged 25%, said a DTZ report last month, pulled down by AXA Immoselect’s June sale of six offices and one retail property at a 40% discount. As AXA was then entering its third wind-down year, the restrictions on selling at a maximum 5% discount in year one and 10% in year two of liquidation were lifted. Some funds are taking higher valuation cuts on assets that may be partly vacant or in a bad market. Morgan Stanley’s P2 Value fund – now wound down – made big writedowns to adjust to the market quickly.
One observer says: “It took a ‘let’s-get-on-with-it’ approach. Most funds don’t behave that way; they extract value more gradually.” Degi’s funds have completed most of their writedowns, Leser says, yet others that are earlier in their cycle may only be half way through. “Performance of liquidating funds has generally been, and is likely to remain, negative overall,” Pylypchuk believes.
Aberdeen’s Degi Europa had distributed around 50% of the initial net asset value to investors when it passed to its custodian bank at the end of September. It sold 14 assets in total, “never below market price”, Leser says. The last was a long-let Dutch office on Capellalaan 65 in Hoofddorp, sold to investor PPF Real Estate Holdings, which had an existing portfolio in the Netherlands, for €47m in September. “It has been difficult in the past two or three years,” Leser says. “Negotiations are better now; the German market is good. But it depends on the property. Value-added assets are harder to shed. It is generally easier to sell €50m-70m properties.”
Sale discounts hit 28%
Magali Marton, head of CEMEA research at DTZ, says prices for the €4.8bn of sales since 2012 “show an average 2% discount to latest book values. Sales by funds to be closed in 2013 show some prices ranging from -28% to -11% to latest book value.” The main factor driving this €4.8bn of sales was appetite for good-quality assets in Paris and London, so funds with longer dated liquidations decided to sell such assets early. KanAm sold Winchester House in the City late last year, while CS Euroreal plans to sell its last London property, 55 Mark Lane, EC3, for around £100m. Its Plantation Place South, EC3 is on the block after a £145m sale to a South Korean investor fell through.
There have also been €560m of sales in France, at premiums of up to 14%, so far this year. CS Euroreal sold office building 1-5 Rue Neuve Tolbiac in Paris for around €182m, up 30% on latest book value. However, DTZ says the process is far from completed, with the value of assets still held worth €19bn and covering 7m sq ft in Europe. Investors in these funds will hope the market moves in their favour before the final wind-up, for 1m m2 of less liquid assets in southern Europe, 1.2m m2 in Benelux and 338,000m2 in central and Eastern Europe.
Open-ended offer is still worth taking for investors in German winners
It’s not all bad news for German open-ended funds, with inflows for those still attractive to investors picking up this year. CBRE says €3.7bn was invested in the first seven months of 2013, with June and July particularly strong. This is 27.6% more than the €2.9bn invested in all of 2012, according to DTZ. But CBRE points out that some of this money may have been rushing to beat the 22 July 2013 introduction of a German law replacing the Investment Act. This brought tighter regulations for open-ended funds, designed to minimise volatility of outflows, including a new two-year minimum holding period and 12-month notice period. Open- ended fund investment figures did indeed turn negative (-€65m) in August.
Back in 2008 after the onset of the global financial crisis, redemptions hit all funds offering daily liquidity but the open-ended funds that survived often had strong distribution networks to thank. Now they can take advantage of the weakness of their former competitors and CBRE believes that recent inflows mean German open-ended funds will increase their acquisitions through the rest of this year and into 2014.
Union Investment, part of a savings bank, has bought six assets from collapsed funds, including: the Sophienhof shopping centre in Kiel from Degi; the K-Point offices in Luxembourg from AXA REIM; Karlstraße 4-6 in Frankfurt, an office from TMW Pramerica; and the Europa-Galerie mall in Saarbrücken from Credit Suisse. “There are also the first signs of these funds looking beyond the safe havens of Germany and core Western Europe to extend their interest to fringe EU markets,” CBRE said in its August 2013 German open-ended funds MarketView. Deka-managed WestInvest Immo Value recently bought Balitco, an office in Lisbon, for €43m.
A few new open-ended funds have been launched in the past two years. Aachener Spar-und Stiftungs-Fonds was set up in June 2011 and by this August had €106m of funds under management, with net inflows of €18.9m in January to August 2013, according to CBRE. AXA started Immowert in October 2012. Like for like managed funds were €44m; inflows totalled €11.3m. There is even appetite for buying holdings in liquidating funds on the secondary market. Semi-institutional investors are buying shares at a discount hoping the value of the assets after full liquidation will exceed the current exchange price on the secondary market.