- European real estate funds sees assets 10% shrink in 2023
- Outflows accelerated during the fourth quarter
Investors have been liquidating billions of euros in assets in European real estate funds for a year now. German investors in particular have been remarkably active in selling their property positions.
According to data from Morningstar Direct, the total assets of European open-end real estate funds fell by more than 10 per cent to €180 billion by 2023. Investors extracted an average of €660 million per month from these funds, with the last quarter even averaging more than €1.1 billion.
High interest rates and uncertainty regarding debt refinancing play a crucial role in the declining interest in real estate funds. To meet increasing redemption requests, many open-end funds may now be under pressure to liquidate investments.
Real estate inflows negative for more than a year
While there are clear differences between property classes, Real Estate Investment Trusts, known as REIts, are often treated as alternatives to bonds because of their periodic distributions. So higher bond yields are also a possible factor why REITs are less in demand, argues Thomas De fauw, analyst at Morningstar. Nevertheless, some European listed property investors have also recently seen interest from institutional investors looking for more liquidity and diversification, De fauw said.
Germany
German investors collectively pulled more than 750 million euros out of real estate funds in the last five months of the 2023, according to data from Barkow Consulting, a German management consultant.
Investors may have seen the current scenario coming for quite some time, with German real estate financiers such as Deutsche Pfandbriefbank AG, Vonovia SE and Deutsche Bank AG in trouble due to losses on real estate portfolios. German banks - along with French banks - notoriously have the most commercial real estate loans in the European Union, making them vulnerable in this sector.
Between now and 2026, the market faces a $38 billion shortfall between maturing loans and the funding that replaces them, according to asset manager AEW. Hedge funds that take a dim view of the German market have bet €5.7 billion against companies in the country, with Qube Research & Technologies Ltd having the largest short position, including against Deutsche Bank AG and Vonovia SE.
According to Florian Heider, former chief financial markets researcher at the ECB, commercial real estate and a lack of economic growth will be a concern for German banks in the future, despite the financial system having coped well with several periods of turmoil in recent years. ‘The big question is whether they have done good risk management and set aside enough capital for losses,’ Heider said.
German BaFin chairman Mark Branson is more firm. He considers commercial real estate “risk number one” for the country’s financial system.
Institutional allocation
The current average global real estate allocation weighted by AUM is 10.6 per cent for institutional investors, slightly above the average target allocation of 10.4 per cent. Interestingly, the overall allocation is mainly driven by European investors. In Europe, the difference between average target allocation and current allocation is more than 65 basis points, according to research by INREV, a trade association for investors in unlisted real estate.
According to the survey, investors have not so much become cautious about real estate, they have become more selective in how exposure is designed.
For example, 84 per cent of investors in European real estate have plans to increase their allocation to unlisted real estate debt over the next two years. More than a third of those surveyed say they want to reduce exposure to funds of funds, REITS and direct real estate, according to the survey of 90 global investors with combined assets under management of €830bn.