The European Public Real Estate Association (EPRA) has responded to the announcement of the new restrictors imposed on German open-ended real estate funds (GOEF) by repeating its call for the expansion of the German listed property sector.
The new rules for GOEFs, intended to protect retail investors and prevent future occurrences of the fund failures witnessed in recent times, introduces a 12-month notice period for redemptions and a two-year minimum holding period. There are further restrictions on the amount of and periodicity that money can be withdrawn.
According to EPRA, although changes will weaken the GOEF proposition for many investors, particularly pension funds, on a positive note, the situation is at least now more transparent.
"These changes put beyond any doubt, the limitations of the GOEF in terms of liquidity. In addition, it is a clear indication of the underlying volatility of the vehicle - a myth glossed over by smoothed valuations," EPRA CEO Philip Charls said.
"In this respect, they are a welcome development, as at least there now can be no misunderstanding. However, the changes highlight the dire need for a suitable, liquid, low cost, regulated form of property exposure for investors. Notably, a properly functioning German listed real estate sector."
At present an estimated 25 billion of the GOEF's 88 billion assets under management are in funds having suspended redemptions with the result that many investors have found out the hard way about the limitations of the GOEF proposition and lost significant amounts of capital.
The rule changes were necessary to ensure GOEFs structure are more robust in the long term and can withstand future market shocks, but other issues remain. EPRA is concerned with the GOEFs fee structure disclosure and marketing practices, believes the GOEF model remains far from ideal and that its predominant position in retail investment sales will be increasingly difficult to justify.
Philip Charls, EPRA CEO, said: "The GOEFs have become a very restrictive investment product, with very inflexible terms. We expect that the 12-month notice period and a two-year minimum holding period will result in institutional investors staying away from GOEFs in the future. There might still be demand for this product with retail investors who are prepared to accept the limitations and tie up their capital, but it is clear that alternative options are now needed to enable German and global investors to gain exposure to German commercial real estate. German REITs are worryingly under-represented at the moment, and should be part of the solution."
Of the 10 largest global property markets (with the exception of Italy at 0.6%), Germany has the lowest proportion of its underlying real estate held within the listed sector at only 1.5%. This compares with France at 6%, the US at 5.8%, Australia at 16% and a global average of 5.1%!
A healthy real estate sector needs a good balance of listed and private investment vehicles both from an operational perspective and to ensure the right investment opportunities are available for the broadest range of investors. The current unbalance in favor of private structures such as GOEFs or Specialfonds is simply unsustainable.