Unsafe as houses

bvi_germanflagA storm is brewing in the German open-ended property fund market. Open-ended property funds, which have nearly €90bn under management in Germany and have long been a mainstay of the fund management industry there, are coming under pressure from Germany's ministry of finance to implement radical reforms.

In order to alleviate the liquidity problems that have plagued the funds over many years, the ministry of finance wants them to introduce minimum two-year holding periods and two-year notice periods for investors and to devalue their real estate holdings by 10%.

Last week, open-ended property fund management companies in Germany got together and released alternative and much milder propospals through the German fund trade association, the BVI. Rather than devaluing their holdings, the property fund management companies want properties to increase the frequency of valuation by independent experts from once every 12 months to once every six months. They also want a reduced 12-month rather then two-year minimum holding period for new investors only, with a 12-month notice period applicable to institutional investors.

“We believe that these measures will considerably improve liquidity management of open-ended real estate funds and make the product even more attractive to the many private investors,” said Stefan Seip, director general of the BVI.

Many of the investors in German open-ended real estate fund are retail investors and the funds form a important part of retirement planning. To maintain the funds’ appeal to that market segment, the property fund management companies also want real estate fund units to continue to be available to normal private investors on a daily basis after the initial holding period.

“Investors should be able to acquire units every day, as before. This is essential if savings and withdrawal plans, which are typically monthly, are to remain possible,” said Seip.

However, with 20% of German open-ended property funds currently frozen because of liquidity problems, the property fund management companies may have a tough time convincing the ministry of finance that the BVI’s proposals go far enough. 

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