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German real estate is not an open-and-shut case

The problems of open-ended real estate funds might pave the way for the rapid success of Reits.

By Florian Neuhof

Not all is well with open-ended property funds in Germany. In recent months, three big funds with a market value of about €9 billion, or 10% of the total volume of German open-ended funds, closed in an effort to prevent a stampede of investors redeeming their shares.

The largest fund, Deutsche Bank Real Estate’s Grundbesitz-Invest, worth €5.9 billion, was closed after it was announced that the fund was to be revalued. The other two, both KanAm funds that were previously performing well, closed after local property rating agencies switched their recommendation from hold to sell.

Investor confidence in open-ended funds has taken a blow, according to Michael Clauss of financial research consultancy Eurozone Advisers, as the apparent overvaluation practised by rating agencies in the past has undermined their trust. Indeed it is odd that funds have continued to receive positive ratings against a backdrop of diminishing returns (from 5.7% in the heyday of 2001 to 3.6% in 2005) and a property market in decline.

But although it is logical that property funds should be affected by bad market conditions, the malaise is also the result of structural problems. As Ralf Groenemeyer, head of equity strategy and real estate analyst at Commerzbank, points out, open-ended funds are designed to be long-term investments that provide a stable return.

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