The political debate in Germany over the future of open-ended property funds has focused a spotlight on the fundamental structure of the underlying real estate investment market.
Germany differs markedly from nearly every other major economy worldwide due to the absence of a large listed real estate sector.
The experience of other countries suggests that the economy is therefore only benefiting to a limited extent from the strong investment flows and professional services these listed companies can bring to the urban landscape, the European Public Real Estate Association (EPRA) argues.
Philip Charls, chief executive of EPRA, says: “Germany has by far the smallest listed real estate sector of any major economy globally, due to historical structural obstacles to the market’s growth. Yet you only have to look across the border to France to see what can be achieved in terms of more jobs and investment in less than ten years, if these companies are provided with the right conditions to thrive. The strong long-term dividend flows listed property firms generate are also a good match for pension fund liabilities and so can form an important and reliable part of retirement income in old age.”
In contrast to other major economies, real estate investment in Germany has focused on the open-ended property fund model, largely distributed by local banks, for over 50 years.
Economy State Secretary Bernhard Heitzer told a recent conference of the RDM Association of Property Professionals and Caretakers (Ring Deutscher Makler) that the government had decided to retract a proposal to prohibit the creation of further open-ended property funds after the industry complained that this could cut many small investors out of the property market. Whilst this is true, it is also the lack of a large developed listed real estate sector in Germany, bringing with it the transparency, liquidity, and lower costs that real estate stocks offer, that has curtailed investors’ options.
EPRA believes that the time is now right in the evolution of the German market for the expansion of the listed sector to bring the significant economic benefits of these companies to Germany, in a similar way to the role they play in every other major developed country worldwide.
Investing in property stocks is subject to minimal fees compared with the multi-layered costs, including up-front, share and property transaction fees, of many open-ended funds. A study carried out by the University of Regensburg in 2011 also showed that the average annual return of eurozone property stocks has been 7.2 per cent since 1989, compared with five per cent for the open-ended funds.
Listed German property companies have raised just under EUR3.0bn in equity since 2007, from both domestic and international investors, and this capital has flowed almost exclusively into Germany supporting local economies and creating jobs. In contrast, the open-ended property funds have a far smaller proportion of their invested assets in Germany (around 35 per cent).
At a time when the building stock of German cities requires intense investment to allow the country to meet its energy sustainability targets, the listed sector can act as an efficient conduit to channel capital into the renovation of houses, offices, and retail premises and support the adoption of new environmental technologies.
Olivier Elamine, EPRA board member and chief executive of German listed real estate company alstria Office REIT-AG, says: “There is around EUR20bn sitting frozen in open-ended property funds which could be put to work in the German economy should the government offer their investors the option of converting these assets into listed property companies. This opportunity should be seized, not only to safeguard existing investors’ interests, but as a potential catalyst for kick-starting a large dynamic publicly quoted property sector at the same time as giving a boost to the economy and helping small investors, pension funds and insurers.”
The rapid growth of the stock exchange listed real estate sector in France, which has created strong jobs growth, high investment in French cities and solid tax revenues, could be replicated in Germany with the right market conditions and government policies.
A recent study by consultants PwC on the socioeconomic impact of the listed French REIT sector (or SIICs in French), which was established in France in 2003, concluded that the business activities of these real estate companies had strong positive benefits for the economy.
PwC calculated that through their large-scale real estate development, operating, and investment activities, REITs generated over 66,000 jobs in France in 2011 alone. The study estimated that these companies would invest a further EUR17bn over the next five years, generating more than 140 million working hours in the construction/public works sector (the equivalent of 88,000 full-time workers per year) and around 34,000 jobs in the retail sector.
PwC said the REIT structure was also a “winning regime” for the French treasury with the total tax paid by the companies – and their investors on dividends, totalling EUR552m in 2010. The corresponding tax take calculated using the standard rate of corporate income tax in France of 34.43 per cent, would be EUR190m.
The French REIT sector with a total of 35 companies and a market capitalisation of EUR46bn is, however, more than four times larger than the German listed real estate industry at 16 firms and a market capitalisation of EUR11bn. France’s property stocks have been the biggest growth success story on the French stock exchange in the last ten years.
A study commissioned by the Bundesbank a few years ago and entitled: “Open-end real estate funds in Germany – Genesis and crisis,” drew an historical comparison between the situation in Germany and the development of dynamic domestic listed real estate sectors in Australia and the Netherlands after their open-ended property funds were threatened with collapse, following large withdrawals of cash by investors.
The roots of the Australian and Dutch open-ended funds crises were similar to the German situation and due to a fundamental mismatch between the liquidity of the funds’ structures – with investors able to quickly and easily withdraw their money – and the illiquidity of the underlying property assets, which can often take many months to sell.
In the early 1990s, the Australian government stopped redemptions in its open-ended property funds for 12 months after huge withdrawals by investors, forcing the funds to list on the stock exchange as an exit route from the situation. The number of listed property companies subsequently increased from 11 to 47 between 1993 and 1999 and market capitalisation from AUD5bn to AUD30bn, providing a vital source of dividend income to Australia’s compulsory contribution pension fund system. Today, the Australian real estate market is ranked as the third most transparent globally compared with Germany in 12th position.
Around the same time as the developments in Australia, a similar situation occurred in the Dutch market when the open-ended listed Rodamco fund froze redemptions due to heavy capital outflows. After a large injection of capital from a major Dutch pension fund, the company was able to resume its investment activities, later splitting into four listed entities and it 'lives on' today as part of Europe’s largest and most successful public property company – Unibail-Rodamco.