Swiss Life A new challenger shakes up real-estate investments

Open-ended real-estate funds are having trouble spending their investors' money as fast as it is pouring in. A young fund wants to do things differently.
For big, traditional open-ended real-estate funds big ticket investments such as hotels in Manhattan are possible.

Open-ended real-estate funds are swimming in money. They collected more than €4.5 billion ($4.8 billion) in fresh investor capital last year. And it could have been much more had a number of companies not temporarily suspended the sale of shares in the funds.

Large traditional funds like Deka and Union Investment, as well as relative newcomers like KanAm’s Leading Cities, and Deutsche Bank's Grundbesitz Fokus Deutschland, have turned down millions in investor capital. The reason was always the same: They had no place to invest the money. But a new open-ended fund on the block, Swiss Life, wants to shake things up.

The insurance company plans to start raising investor capital in the second quarter for Swiss Life Real Estate Living and Working – its open-ended real-estate fund, which like others, pools money from an unlimited number of investors to buy properties. Its parent company, Swiss Life Group, has already shelled out the first €200 million – a drop in the bucket for an insurer that manages about €65 billion in real-estate assets. Ingo Hartlief, head of the company managing the new Swiss Life fund, hopes to add investments to the tune of €300 to €500 million by the end of 2017. Given the substantial demand, raising the €50 to €150 million still needed from private investors is unlikely to be a problem.

08 p34 All Beginnings are Difficult-01

But the recent experiences of rookies KanAm and Deutsche Bank suggest it will be more difficult than anticipated for Swiss Life to find suitable properties in today's hotly contested real-estate market. With an investment volume of €108 million KanAm, for instance, is a long way off of reaching its goal of €1 billion to €2.5 billion within five years – the target it set itself when it took the plunge onto the open-ended market after surviving the financial crisis in 2012. That’s because the glut of money in the property market has driven up prices and continues to reduce yields, a downward spiral that Hans-Joachim Kleinert, managing partner of the KanAm Grund capital investment company, wants to avoid.

"On the real-estate side, we are not allowing ourselves to be seduced into buying anything that isn't tied down, in today's difficult markets. Instead, we are only acquiring profitable properties in cities and locations with future prospects," said Kleinert, adding that the fund's management has withdrawn from many bidding procedures.

Anke Weinreich, manager of Grundbesitz Fokus Deutschland, offers similar explanations for spending only 70 percent of the €400 million collected from investors on real-estate. "We have not accepted any new customer funds since mid-2015," she said, adding that it is unclear when this will change.

She expects fund assets to eventually reach €700 million. But that could take a while as new funds can’t keep up with industry heavyweights. The little guys can’t spend €200 million on a hotel in Manhattan, as Union Investment's Global Fund did shortly before Christmas. Instead, they’re spending in the range of €20 to 50 million on a property.

Still, Swiss Life manager Mr. Hartlief isn’t deterred by the experiences of his competitors. He’s confident he can move quickly on investments by tapping into longstanding relationships in the real-estate business. Plus he has the backing of a well-financed parent company.

It cannot be ruled out that, in the current high-price phase, the young funds are also acquiring the risk of potential declines for the future. Sonja Knorr, real-estate fund specialist, Scope

Even so, some analysts are advising caution. "It cannot be ruled out that, in the current high-price phase, the young funds are also acquiring the risk of potential declines for the future," said Sonja Knorr, a real-estate fund specialist with the Scope rating agency. The tale of two funds, Morgan Stanley P2 Value and TMW Weltfonds, counts as a warning to the new kids on the block.

They built their portfolios in the peak phase before the 2008 property crash. When they – like many other open-ended real-estate funds – had to be liquidated, their investors suffered heavy losses. This is why Ms. Knorr sees a positive side to slow growth. "The hesitancy with which the young funds are building their portfolios suggests that they are buying with caution."

Open-ended real-estate funds – large and small – are seeing a further challenge. They’re keeping little cash on hand for the simple reason that the cost of keeping money in the bank is eating into current yields. Grundbesitz Fokus Deutschland is a case in point. Although the rental returns for the fund’s acquired buildings exceeded 6 percent at the time of purchase, according to manager Ms. Weinreich, the annual yield is only 2.1 percent. This is because the fund was carrying around a large liquidity cushion for a long time.

Ms. Weinreich is unwilling to specify how much yield investors can expect with a lower liquidity ratio in 2017. When the fund was launched, Georg Allendorf, managing director of Deutsche Bank Group’s Deutsche Asset Management, had anticipated a 4 percent return. Swiss Life manager Hartlief expects an average annual return of 2.5 percent. That’s slightly less than investors can expect to earn on average with open-ended real-estate funds. The average annual return on these funds was 2.8 percent in 2016, according to figures from the German Investment Funds Association.

The management of KanAm's Leading Cities fund has delivered on its promise of a return of 3 percent from the start thanks to a mechanism the business uses to prevent liquidity from reducing returns on real estate. Investors are only asked to deposit funds when the purchase is certain.

Reiner Reichel specializes in real estate and the capital markets. Contact the author at: reichel[email protected]