In February, the IPD German Monthly Open Ended Property Fund Index OFIX, for M2/2013, reported that open-ended funds for German real estate substantially outperformed the market, with an annual return of 2.3% against -0.2% for funds with a European focus, and -1.0% for those with a global focus.
Compared to February 2012, index volume decreased by €1.2 bln or 1.7%, primarily as a result of fund liquidations. 10 out of 22 OFIX funds have entered liquidation, and their fund volumes have decreased by €1.0 bln compared to last year. These vehicles are now worth €18.6 bln and account for 25.7% of the OFIX index. The OFIX index covers 22 funds targeting retail investors, with a total value (NAV) of €72.5 bn.
Figures recently published by Deutsche Bundesbank shed light on shifts in the asset allocation of German property funds. In contrast to the OFIX, which covers funds for retail investors, this report shows figures for public funds for both retail and institutional investors. Therefore, the aggregated net fund volume of the 59 funds covered is €83.8 bln, compared to €72.5 bln for the OFIX funds. IPD covers the remaining €11.3 bln of public funds for institutional investors in the IPD/BVI German Quarterly Spezialfonds Index SFIX.
The Deutsche Bundesbank report shows that by the end of 2012, public funds had €59.2 bln of capital value invested in direct property holdings, and €18.4 bln invested in Special Purchase Vehicles (SPVs). These figures reflect the decline in the capital values of property investments, and match the trend in declining fund volumes.
It is however remarkable that managers reduced their indirect holdings more quickly - from €20.8 bln in 2011 to €18.4 bln in 2012 - than their direct holdings, which were reduced from €60.8 bn. to €59.2 bln. Of their direct investments, the exposure to German properties even increased, from €22.4 bln to €22.7 bln, while property holdings outside Germany were reduced from €25.4 bln to €23.6 bln.
The report provides interesting insights into the shifts of asset allocation, but the data needs careful interpretation, as declines in the property values may either stem from sales in the respective markets or from capital depreciation of the properties.
The asset allocation of German funds is in line with the outperformance of German property markets in recent years, in comparison to other European markets. Within the group of funds exclusively open to institutional investors (Spezialfonds), the investment focus on the German market is even more pronounced. Direct investments within Germany rose from €22.0 bln in 2011 to €25.0 bln in 2012, while investments outside Germany only grew from €10.8 bln to €11.0 bln.
“Although we do not see a tendency to over-investment or the likelihood of a bubble in the German market, pro-cyclical investment strategies risk resulting in the underperformance of portfolios in the long term”, said Daniel Piazolo, Managing Director of IPD in Germany.
“Consequently, investors should consider whether arguments for Germany as a safe haven still hold, or whether they are just following the herd.”