Open-ended real estate funds report record inflows in 2019

Open-ended retail real estate funds have reported record inflows this year, helped by the further widening in the spread between government bond yields and returns from the property market, according to data from Scope Analysis.

“The 3.8 percentage-point spread between yields on open-ended real estate funds and German government bonds has very rarely been so wide,” says Frank Netscher, analyst at Scope.

Comparing the average yield of 14 open-end retail real estate funds with the performance of German government bonds over the past 15 years shows there has always been positive differential – an “excess return” or “premium” – in favour of open-ended retail real estate funds – and the spread has widened steadily since 2013.


“On the one hand, yields on government bonds have fallen steadily, with the yield on 10-year German bonds in negative territory for much of 2019. On the other hand, yields on open-ended real estate funds have also risen steadily, driven primarily by increases in the value of properties in fund managers’ portfolios,” says Netscher.


The yield differential of 3.8 percentage points at end-September 2019 was the widest since the first quarter of 2009. Then, yields on German government bonds had fallen faster and more sharply than yields on other asset classes while annual yields of open-ended real estate funds were at an unusually high 7 per cent in previous years. This anomaly was mainly due to high capital gains, sometimes on entire real estate portfolios sold to foreign investors just before the outbreak of the financial crisis.


“Funds data show that inflows are tightly correlated with the extent of the premium of open-ended real estate funds over government bond yields,” says Netscher.


However, the excess return of open-ended real estate funds is not the only determinant for inflows.

“We would note that the inflows would have been even higher in recent years if numerous funds had not limited or suspended their acceptance of new investors,” he says. “Nevertheless, despite these restrictions, net inflows remained at a historically high level, only exceeded in 2009 and 2016.”

Scope does not expect interest rates to rise in the short term. Yields of German government bonds are likely to remain negative for some time.


“Yields on open-ended real estate funds will also not change by leaps and bounds,” says Netscher.

Scope expects stable or slightly declining returns for open-ended real estate funds in the medium term. Scope also sees little prospect for further appreciation in the value of existing properties while newly acquired properties have been purchased at high prices, so yields are comparatively low.