While the open-ended property fund sector is feeling the downstream effects of the real estate market crisis, it faces the year now in progress with cautious optimism. The crisis ramifications are visible in the decline in cash inflows, among other things. Having started to decline last year, their sum total for the months of January through November 2022 dropped to c. 4.7 billion euros, down by a third compared to the prior-year period. Due to the lull on the transactions market, venturing acquisition forecasts for 2023 is fraught with more uncertainty. Conversely, the investment funds benefit from robust rental markets and a parallel growth in rents. A closer look at the total fund landscape shows that retail properties are being sold off faster than real estate of other use classes whereas the residential real estate exposure is being increased. The logistics share is also growing. As far as the ESG topic goes, industry efforts concentrate on implementing the new regulatory measures introduced last year. Since August 2022, it has been mandatory to take the principal adverse impact (PAI) factors into accounts in the sustainability context. Most of the open-ended public property funds are currently categorised as Article-8-plus funds under the Sustainable Finance Disclosure Regulation (SFDR). So-called impact funds or Article-9 funds for private investor are not expected to become available in 2023. These are the key takeaways of the online press conference headlined “Outlook 2023: What are the Plans of Open-Ended Property Fund Managers?“ which was attended by Michael Schneider, Managing Director of INTREAL, Ulrich Steinmetz, Managing Director of DWS Grundbesitz GmbH, Arnaud Ahlborn, Managing Director of INDUSTRIA, and Michael Kohl, Head of Open Investment Funds at KGAL.
INTREAL: Cash Inflow and Yield Rates Lower than Expected in 2023
Michael Schneider of INTREAL analysed the general market development. He emphasised that the open-ended public real estate funds showed a stable performance in 2022 when compared to equity and bond funds. “According to the Bundesbank, the net fund assets of real estate funds grew by 5.2 percent between January and November 2022, whereas those of equity funds decreased by 10.5 percent and those of bond funds by 17.5 percent.”
With a view to 2023, Schneider said: “We expect cash inflows to be somewhat lower than in 2022. And our return expectations are just as conservative. Capital growth will no longer contribute as much to the total rate of return as it did in recent years. Although rent rates will grow significantly, their ability to compensate for the former effect remains doubtful.”
On the subject of impact funds for private investors, the Head of INTREAL had this to say: “We do not expect an impact product for private investors to go live in 2023. For the time being, Article-9 funds are virtually impossible to set up because of the many open issues that remain and because of the liability risks that characterise public funds. However, we are in talks concerning the launches of several new Article-8-plus funds. Just when these funds will actually be put on the market has not been decided due to the keen sense of uncertainty. But once the market situation brightens, it could happen rather quickly.”
DWS: Focus Remaining on ESG and Diversification
Ulrich Steinmetz of DWS, a company that manages public real estate funds with a combined total of 15 billion euros in net fund assets, highlighted the tailwind the sector is getting from the rental market: “It cushions the repercussions of the strained economic and geopolitical environment. We expect to see rental growth across all use classes, with the fastest rate of growth in the residential and logistics segments. The investment funds of DWS have been increasing their residential share for years while lowering their office share in favour of broader diversification. In the case of the Grundbesitz Europa fund, for example, we raised the residential share from 3.0 percent in June 2019 to 16.2 percent in December 2022, and in the case of the Grundbesitz Global fund from 2.8 to 19.0 percent. And this trend is set to continue.”
At the same time, Steinmetz stressed the importance of the ESG theme: “The ESG focus is here to stay for the public funds, and it will define 2023, too. For instance, the reenactment of MiFID-II directive in August 2022 prescribes that negative effects for sustainability themes—called principal adverse impacts or PAIs—be recorded. This would include, for instance, portfolio properties with poor energy efficiency. Our objective for 2023 and beyond is to reduce the adverse impacts while enhancing the environmentally friendly features. To this end, we will implement additional ESG measures on the fund level, e. g. by optimising the use of building control, heating and air conditioning technology, and by undertaking façade upgrades.”
INDUSTRIA Intends to Invest 50 to 150 Million Euros in 2023
Arnaud Ahlborn von INDUSTRIA elaborated on the plans and prospects of the FOKUS WOHNEN DEUTSCHLAND investment fund, which concentrates on residential real estate in Germany and which holds approximately one billion euros in net fund assets. “We assume that we will be spending between 50 and 150 million euros on real estate acquisitions in 2023. The current jitters make it hard to venture any kind of forecast. Moreover, we acquired quite a number of properties for the fund in 2022. So, the pressure to buy is not very high at the moment. In 2023, we will initially gravitate toward the acquisition of subsidised housing units because these have been made more attractive by the rise in interest rates. But we are also open to privately financed apartments. I am convinced that we will resume our acquisitions of privately financed apartments in the second half of the year, once the market has settled down.”
Ahlborn also touched upon the fund’s debt finance situation: “Principally speaking, public funds benefit from their low leverage ratios during times of rising interest rates. The FOKUS WOHNEN DEUTSCHLAND fund currently has a leverage ratio of 15.7 percent. Moreover, we already secured further loans in an amount of 90 million euros at very affordable conditions before the interest rate reversal. These we intend to draw down in the coming months. It will bring our leverage ratio up to around 25.6 percent in the longer term.”
As far as sales are concerned, the head of INDUSTRIA signalled optimism: “We are off to a good start in 2023. Cash inflows have increased since the beginning of the year, and the number of redemption requests has declined at the same time.”
KGAL Expects 2023 Performance to Match the Level of Previous Years
Michael Kohl of the company KGAL presented the plans for the KGAL immoSUBSTANZ public fund, which owns c. 69 million euros in fund assets, and which focuses on office and basic retail properties. “The fund was launched in 2019 and is still in its set-up phase. In 2023, we will keep a close eye on our target markets, which are Germany, Austria, France, the UK, specifically on the important use classes of office and retail. The capacity to act is ensured by our high level of liquidity. Our net fundraising goal for 2023 is another 50 million euros. Moreover, we are planning to reinforce our sales arm and sign up 25 new sales partners.”
But KGAL is also monitoring segments outside the real estate market: “At the moment, we are preparing an open-ended infrastructure fund for private investors that will invest in photovoltaic systems and wind turbines. We are aware of serious demand potential in this area.”
