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German Property Funds Outperform European and Global Investment Vehicles

Investment in Real Estate Assets Remains Attractive, Says IPD

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German property funds tracked by UK performance analysis group IPD outperformed global and Europe-focused property investment vehicles in the year to March 2013, returning 2.3 percent as against -1.0 percent for global and -0.3 percent for European property funds, IPD said in its monthly assessment of the sector. The report also showed that inflows surpassed outflows from liquidating property funds, indicating a return of investor confidence in Germany’s real estate market.

According to the IPD German Monthly Open Ended Funds Index OFIX, over the past year only German-allocated funds outperformed inflation, 1.4 percent in the 12 months to March, while European and global sub-indexes returned losses in both real and nominal terms. In March alone, OFIX returned -0.1 percent. The sub-index for property funds mainly investing in Germany returned 0.1 percent, beating funds focused on European markets and also globally investing funds, which returned -0.1 percent and -0.3 percent, respectively.

“Investment in Real Estate Assets Remains Attractive”

Open-ended property funds are collective investment schemes which basically work like mutual funds except that they buy property -- mostly office and retail complexes -- instead of stock. These real estate investment vehicles have been popular in Germany for decades, but over the past five years the global financial turmoil compelled retail and institutional investors to drop property funds and search for higher yielding assets. As the economic crisis put retail investors under pressure, many open-ended German funds froze redemptions with their cash reserves falling too low. This frightened some institutional investors who used the property funds as a substitute for money-market funds but then could not use them to park cash for short time periods. The redemption requests became so large that some funds had to be liquidated.

Now, interest in these investment vehicles is coming back, as suggested by IPD’s recent findings. The performance analysis group said in its latest report: “With many risk-averse private investors avoiding volatile equity markets and still nervous of government bonds due to the ongoing euro crisis, investment in real estate assets remains attractive.” Although the liquidation of some funds has meant a loss of confidence across the entire market, traditionally, real-estate investments in Germany have a strong appeal with retail investors because they are perceived as safe havens in times of market and economic uncertainty and when inflation fears are heightened.

Despite the fact that 10 out of 22 OFIX funds have entered liquidation, overall index volume slightly increased to €72.6 billion (£47.3 billion) in March, with net inflows to active property funds surpassing outflows from funds in liquidation. “Investors in the funds that remain on the market are showing confidence that these will continue to produce stable returns,” IPD noted in its report.

Daniel Piazolo, Managing Director of IPD in Germany commented: “The performance of German open-ended funds remains split, and the divide is based on fund status rather than asset allocation. While the decline in returns of many funds in liquidation accelerates as funds continue to sell off properties, returns to the active funds remain stable, as do their capital flows.”

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