Patience test for investors: Open-ended real estate funds: When investors can hope for their money | news
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by Christoph Platt, Euro am Sonntag
Gut things take time, as the saying goes. Unfortunately, it’s not always just the good things that take time. Sometimes the unpleasant also drags on too much.
The investors in the open-ended real estate funds, who had to give up in the years after the financial crisis, experience exactly that. Their capital has been stuck in the products for more than ten years. They had to watch as the assets of the funds were first frozen and then wound up. First the original providers of the portfolios had a few years to sell their buildings, then the custodian banks, to which the assets of the funds had been transferred by law, continued their work. The income was gradually distributed to the investors, the fund volume fell.
Meanwhile, the ordeal seems to be almost over. Almost all of the products have monetized their properties. Of the ten funds that are relevant for private investors in liquidation, only Degi International still holds a property, an office building in Bucharest. In all other portfolios, the number of buildings is now zero.
With the complete sale of all properties, many investors expected a line under the unpleasant chapter. But so far it has not been able to be drawn. Because the custodian banks only issue the money successively. There is still a lot of capital in the liquidated portfolios. It is a total of 1.2 billion euros.
The assets of CS Euroreal and KanAm grundinvest are particularly large – each between 400 and 500 million euros (see table below). The SEB ImmoInvest is still worth an impressive 180 million euros. In 2009, however, the three were also among the largest open-ended real estate funds and each managed between 4.7 and 6.5 billion euros at the time.
The liquidity that the funds are currently holding back is used to hedge against contingent claims. Behind this are a number of claims that could be asserted against the custodian banks. On the one hand, there are warranty obligations that exist towards the sellers of the real estate. If it turns out that something is wrong with the building, the purchaser can still demand compensation for certain defects years after the purchase. In addition, there may be costs for any legal disputes.
Risks are hedged
On the other hand, the custodian banks refer to possible additional tax claims. The annual financial statements of companies, which also include special-purpose vehicles that were part of the open-ended real estate funds, are often only processed for tax purposes after a long time. A lag of five to seven years is not uncommon, according to Commerzbank, which is responsible for handling CS Euroreal and the two Degi funds. “This means that provision must be made for the possibility of significant additional tax payments if the local tax authorities do not recognize a tax model chosen for the benefit of the community of investors,” explains a spokeswoman for the bank.
Such statements are commonplace for many investors. They claim that the custodians make it too comfortable by holding back the money for all eventualities. In addition, it is not stated precisely enough how high the need for liquid funds really is. For the largest open-ended real estate fund in liquidation by assets, CS Euroreal, an initiative was launched at the beginning of the year to put pressure on it. The ‘Fair Deal for CS Euroreal Investors’ group calls for more money to be paid out to investors faster. “According to our calculations, a distribution sum of 350 million euros would be appropriate,” says lawyer Robert Peres, who represents the initiative. Peres currently considers just under a third of the current fund assets to be acceptable as a retention in view of possible risks.
Commerzbank has rejected the claims. She emphasizes that the retained assets are fully justified. “In order to ensure adequate precaution, the possible risks were identified, quantified and converted into a suitable precautionary model in the best possible way,” says the institute. An independent auditor and the financial services regulator Bafin examined the calculations and had no complaints. The same is likely to apply to the other custodian banks where the funds are being liquidated.
The institutions behave in a legally correct manner if they only distribute money to investors as soon as individual risks can no longer manifest themselves. But a bad aftertaste remains. Especially since the fund’s fee burden persists, although in most cases there is no longer any real estate to look after. For some funds, the total costs are less than one percent, while the majority are higher. A generous reward for the fact that only liquid funds have to be managed. In addition, the negative interest that is incurred on bank deposits of this magnitude gnaws at the available liquidity.
For investors who want to quickly draw a line, there is only one way out: selling their shares on the stock exchange. The transaction volume is low, however, and some funds are rarely traded. In addition, the prices there are significantly lower than the official share value. Investors who want to sell their shares in this way have to accept discounts of 17 to 30 percent.
Otherwise only the motto “Close your eyes and through” remains. After all, some funds are actually already on the home stretch: Some of the smaller portfolios are expected to close in 2022 (see table). However, the custodian banks cannot promise whether this goal can be achieved. Other funds – including the three former heavyweights CS Euroreal, KanAm grundinvest and SEB ImmoInvest – need years before they are finally dissolved.
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