The lack of a large, dynamic, listed corporate real estate sector in Germany, comparable with neighboring economies, appears to have curtailed investor returns over the long-term by limiting their property investment options, a recent study commissioned by the European Public Real Estate Association (EPRA) shows.
Philip Charls, EPRA Chief Executive, said: "Our study concludes that the restrictions on the development of a vibrant listed German real estate sector, as exists in every other major economy worldwide, appear to have cost investors dearly in terms of long-term property investment performance."
He was speaking at the German Share Initiative Conference organized by the national property association ZIA in Frankfurt.
The EPRA study compared the total investment returns of the open-ended property funds, as the dominant non-listed real estate investment vehicle in the German market, with the performance of real estate equities for a period of about 20 years since 1989.
The study showed that the average annual return of the EPRA/NAREIT Eurozone Total Return Index has been 7.2% since 1989, compared with 5.0% for the German open-ended funds. The funds also have hefty multi-layered costs, including up-front fees and share and property transaction fees, while their listed peers are subject to minimal investment costs.
The research was carried out by Steffen Sebastian, Professor of Real Estate Finance at the
International Real Estate Business School (IREBS), University of Regensburg, Germany.
The study showed a remarkably stable and straight trend line for total investment returns from the open-ended funds over a period of 20 years, despite obvious fluctuations in the real underlying property market, which, in contrast are clearly reflected in real estate share prices.
Professor Sebastian said that when the funds average total returns (capital values plus dividends) are broken down on an annual basis it can be seen that these have been steadily reducing in recent years, making it increasingly difficult for managers to justify their high fees.
The German open-ended fund sector has assets of around 85 billion, with approximately 30% of the market currently closed for redemptions due to the liquidity problems the investment vehicles have experienced in the past few years. In comparison, the listed real estate sector in Germany is much smaller at between 10 billion and 12 billion in market capitalization, or approximately 1.5% of the total underlying property investment markets estimated at 1.0 trillion.
The small size of the listed real estate sector versus other major European markets such as the UK or France, has been attributed to the far less developed equities investing culture in Germany. It has also been attributed to the dominance of local banks' investment distribution and advisory networks, which market the German open-ended property fund products as a type of conservative real estate deposit account.
The open-ended funds are not permitted by law to sell their properties below the latest valuations, and so in the current market situation they may be obliged to write-down certain assets before selling them.
Conversion to a listed real estate vehicle could allow the funds to avoid being wound-up and prevent them being seen in the market as vulnerable 'forced sellers', but this is not permitted by German law despite EPRA's best lobbying efforts. Listed companies also tend to far more actively trade and manage their portfolios than non-listed funds.
There are a number of historical market examples of where distressed situations in private real estate markets have been resolved through exits into closed-ended listed stock structures. For example, in the case of Dutch open-ended property fund Rodamco in the early 1990s and in the Australian open-ended real estate fund industry in the late 1980s.
Philip Charls concluded: "The structural distortion in the real estate investment market in Germany has led to lower returns for investors such as German pension funds and insurers fro
