“Coal is not an energy source of the future,” explains a spokesman for the Sparkassenfondhaus.
Frankfurt Deka says it will partially withdraw from coal investments on May 1. The Sparkassen-Fondshaus placed corresponding information on its website on Friday afternoon. “Coal is not an energy source of the future,” a spokesman told the Handelsblatt. Coal is considered an important emitter of greenhouse gases and therefore a driver of climate change.
According to the Deka spokesman, future sales thresholds will apply to retail funds aimed at private investors. Mining companies would be excluded if they generated more than 30 percent of their coal sales.
A hurdle of 40 percent applies to energy producers. According to the environmental organization Urgewalt, large companies will no longer be considered for investments with these limits: the Indian NTPC, the Swiss one Glencore or the Chinese huaneng. Even stricter rules should apply to pure Deka sustainability funds.
According to the spokesman, coal miners are completely excluded from this, companies from the power generation sector from a sales threshold of ten percent. The coal approach is part of overarching sustainability strategies that seem to deliver superior returns from an investor perspective.
Different approaches to competition
The other three large German fund houses are taking different approaches on the subject, as inquiries from the Handelsblatt revealed. Union Investment tightened its approach in mid-February, as a spokesman for the fund provider of the cooperative banking group explains.
Coal miners would be excluded from a certain share of coal in total sales. This threshold has been reduced from 30 to five percent, and will be zero in 2025. According to industry estimates, there are around a dozen large companies in this field such as Glencore or Anglo American.
According to Union Investment spokesman, the electricity generators are also affected by coal. Discussions with companies currently underway should clarify to what extent the addresses pursued a credible strategy for the transition to a climate-neutral world. The spokesman says: “If we are not convinced of this, we will exclude companies with a coal share of more than 25 percent of sales.”
At the Deutsche Bank fund house DWS “there are no exclusions in classic funds,” says a spokesman. This is different with those products that are explicitly looked after from a sustainability perspective.
Here a sales share threshold of 25 percent applies. Companies above it would be excluded. The DWS representative gave one reason for deciding not to exclude classic funds: “If we are out as an investor, we can no longer exert any influence on the company.”
Allianz global Investors acts in a similar way to DWS and defines sales thresholds in its sustainability funds as a starting point for a possible exclusion.
The environmental organization Urgewald welcomes the changes at both Deka and Union Investment. However, her spokeswoman Kathrin Petz restricts that there remains a major shortcoming: “With their new guidelines, both can retain RWE as Europe’s largest coal-fired power plant operator and one of the largest lignite producers worldwide.”
More: Investors are also demanding sustainable strategies from companies in the corona crisis.
Erfurt Claus 2020 has big plans for 2020. The managing director of BNP Paribas REIM in Germany – the real estate investment arm of the French major bank – plans to launch an open real estate fund.
With this, the investment manager, whose real estate expertise in Germany has so far been reserved primarily for wealthy and institutional investors, also wants to enter the market for retail funds.
Or rather: wanted. According to the original plan, the fund should start selling at the beginning of April. But then Corona came and everything for Thomas’ plans was different than expected. “We have now postponed the start of our new mutual fund to June 2020,” he says.
The virus pandemic not only keeps the economy under control, but also the capital markets. If retailers and hoteliers today apply for deferral of rental payments to bridge their slump in sales as a result of the prescribed standstill, sooner or later investors in open-ended real estate funds will also be affected. Through the funds, they are indirectly the landlords of the industries concerned.
Corona crisis different from financial crisis
The situation brings back memories of the financial crisis, when real estate values had to be corrected and funds closed because too many investors wanted their money at once. Experts also expect returns from the funds to decline as a result of Corona. Nevertheless, the situation today is different from that in the financial crisis.
At that time, the epicenter of the financial crisis was in the real estate sector. High-risk real estate loans failed, the nervousness spread rapidly to other real estate classes. In droves, investors withdrew funds from the open real estate funds.
Because they didn’t have enough liquidity buffers to earn all the claims, they were frozen. The funds bought time to monetize their properties. In general panic and under great time pressure, they sometimes made considerable losses, which ultimately also had to cope with the investors.
Today, there is no high-risk real estate loan at the beginning of the economic crisis, but a virus. “What we know from previous financial crises is that the spillover effects become more apparent the closer they are to the cause,” explains Steffen Sebastian, professor of real estate finance at the Ireb Real Estate Academy in Regensburg. However, the real estate is not in a crisis of confidence today.
In the corona crisis, retailers and hoteliers ask for rent deferrals because they are not allowed to open their shops and break down sales – and not because they have encountered problems due to a previously miserable business situation. For many companies, it is a stress test.
“Tenants from the hotel and retail sector have informed us that they want to negotiate their rental payments with us,” says Esteban de Lope, Managing Director of Deka Immobilien. The fund house is not alone in this. The other large providers from Commerz Real to DWS to Union Investment Real Estate also report on corresponding inquiries.
In the interests of investors
This puts the funds in a delicate position: On the one hand, they have an interest in keeping long-term leases – and thus secure income – in the funds and helping their tenants with a temporary solution.
On the other hand, they have to work for their customers, the investors. “We are committed to our investors and therefore do not grant flat-rate deferrals or rent reductions,” said a spokesman for Union Investment Real Estate. In plain language: deferrals remain individual decisions.
If rents are deferred, only the time of payment is postponed. They still have to be paid. But: “There could also be rent losses or rent adjustments here,” says Sonja Knorr, real estate fund analyst at the rating agency Scope.
The funds are also aware of the consequences: “Overall, it can be expected that the rental income of the funds will decline this year,” says de Lope from Deka. No fund manager can and does not yet estimate the extent of the decline.
Investors are not entitled to immediate notification of deferral or loss of rent: “There are no ad hoc notification requirements for open-ended real estate funds. If the fund defers rents or even loses rents, it does not have to notify it immediately. This is enough in the quarterly notifications to investors, ”explains Carola Rathke, partner at the business law firm Eversheds Sutherland in Germany.
Some providers already confirm revaluations. A spokesman for Commerz Real, for example, reports that in the first three months of this year objects dominated by retail were devalued by the experts.
But this also includes: The problems in the trade already existed before Corona, they have now been exacerbated by the crisis. At the same time, Commerz Real emphasizes: “At the moment, however, we are not seeing any significant effects on the management of our properties.” The provider calculates the fund’s return at 2.0 to 2.5 percent, roughly on the previous year’s level.
Loss of yield
Analysts remain more skeptical about the outlook. Rüdiger Sälzle, head of the fund analysis firm Fonds Consult, expects yields to fall by 50 to 100 basis points due to the corona crisis.
“On average, I expect a return of 1.5 to two percent,” says Sälzle. That was calculated conservatively, but manageable in view of the general conditions. The drop in rental income is likely to be felt initially, alongside property valuation and interest on liquidity, one of the return components of the funds. Where new contracts are due and the new rents are significantly lower than the previous ones, this will also lead to devaluations for real estate, says Sälzle.
The bottom line, from today’s perspective, returns remain in the positive range. This speaks in a market environment with highly volatile and sometimes sharply declining stock and bond markets for real estate. Morningstar analysts are already showing that European investors are drawing more capital from equity, bond and mixed funds than ever before.
There are still no official data for the real estate funds. Those of the BVI fund association for the first quarter will not be published until May. Scope analyst Knorr recognizes investment reluctance. “But we cannot see any waves of sales.”
The funds themselves report positive inflows in the first quarter. Commerz Real’s house investment has recorded inflows of 470 million euros since the beginning of the year. “The announcements of returns are still in the single-digit million range,” said a spokesman.
Union Investment Real Estate, whose funds UniImmo Germany and UniImmo Europe are among the largest open mutual funds, also reports on return claims in the single-digit million range. A spokesman for DWS says there are still positive net inflows – ie investments less return requests – and “generally no significantly increased return requests”.
Longer holding periods
In order to prevent a sudden, massive withdrawal of capital, which caused the funds to plummet during the financial crisis, stricter regulations apply anyway. Since 2013 it has been said that anyone who buys an open-ended real estate fund must hold it for at least two years.
Anyone wishing to redeem their shares can only do so with a notice period of one year. The illusion of a completely liquid trade in an illiquid product such as real estate was taken away from investors. Because when the going gets tough, the financial crisis showed, the funds have to sell their assets – and that is far more difficult than trading a stock package on the stock exchanges.
However, there is one exception for investors who bought their shares before 2013: they can withdraw up to EUR 30,000 from the fund every six months. “Today, however, the funds have sufficient liquidity to service these claims,” says analyst Knorr, drawing attention to another difference to the financial crisis. The average liquidity ratio is 20 percent of the fund’s assets. 50 percent must be invested in real estate.
Debt financing is also more conservative today than in the financial crisis, says Knorr. Before the financial crisis, the average was 28.6 percent, today it is 15.1 percent. Some funds even had quotas of more than 40 percent.
With this credit lever, earnings could be increased in good times. This also applies reciprocally to the losses. “Today, a debt ratio of up to 30 percent is required by law. This is very conservative for real estate transactions, ”explains Knorr.
If funds fall below threshold values, for example that less than 50 percent of the fund’s assets are held in real estate, the capital management company must inform Bafin, who acts as the supervisory authority, explains Martina Sradj, partner of Eversheds Sutherland in Germany.
Private investors among themselves
Another stability factor: up to the financial crisis, semi-professional and institutional investors were invested in open real estate funds to a much greater extent than today. “Funds of funds or asset managers were very quick to return their shares at the time,” says Knorr. Today, these actors are not prohibited from investing in open-ended real estate funds. However, a wide range of alternative products has only developed for institutional investors in recent years, which is usually also cheaper.
The proportion of institutional investors in open-ended funds cannot be clearly quantified, but is significantly below the level of the financial crisis. Real estate funds of funds have disappeared from the market for private investors, explains Knorr.
The lawyer Rathke from Eversheds Sutherland adds: “Today, institutional and semi-professional investors are not directly prohibited from investing in open-ended real estate funds. However, there are strict requirements in terms of tax law, so that an investment in the open products is generally excluded. “
If people in countries like Germany, Austria or the USA are talking about relaxing the corona restrictions when shops are allowed to open again, then this should also make things easier for investors in open real estate funds. However, these measures are not a guarantee of a return to normalcy. This also applies to the real estate world. Sälzle, for example, points out the so-called second-round effects: “How the corona crisis will affect the real estate segment in the medium to long term is still completely open,” says the analyst. So the world is today in the “largest joint field trial in the home office”.
In the future, people will return to their normal jobs. But the office world doesn’t have to be the same. “The structure of the office space will change in the medium term. In the future, less space could be rented and employees could be given more flexibility in dealing with their home office, ”says Sälzle. What that means for the funds as a landlord is not yet clear.
Claus Thomas of BNP Paribas REIM, whose fund is due to launch this year, is not worried by this. He already has several objects in sight for sale, including a hotel in Munich. Although hotels in Corona are under particular pressure, he still assumes that use will develop above average in the long term, says Thomas. His fund should also focus on megatrends such as digitization and also invest in healthcare properties – two areas that could well benefit from the corona crisis.
More: Where investors can still find returns in times of the corona crisis
Frankfurt While investors in Europe fled from investment funds with the outbreak of the corona crisis, Dekabank’s business has remained almost stable. Georg Stocker, the new chief executive of the savings bank fund service provider, said on Tuesday: “Looking at sales shows that customers have reacted very prudently so far.” In March there were almost no net outflows overall, Stocker continued. This applies to both private and institutional investors.
This means that Deka is in a much better position than other asset managers. According to an analysis by the rating agency Morningstar, funds in Europe have recently suffered violent outflows. According to the estimate, based on around 90 percent of all funds offered in Europe, investors sold shares for a good EUR 200 billion net in the crisis month of March.
The final numbers will be even higher. The Morningstar estimate does not include institutional business with large investors.
By contrast, Deka is supported by the business with securities savings plans. In the first twelve weeks of this year, it sold more than 250,000 savings plans. “The now well over five million savings plans are a clearly stabilizing factor for our portfolio,” said Stocker.
The former head of Sparkassenvertrieb, who has been a member of the Deka Executive Board for a long time, moved to the top of the company at the beginning of the year, succeeding Michael Rüdiger. Stocker emphasized that Deka had come through the crisis properly so far. “We are well prepared for any further aggravation of the situation.”
Like other financial institutions, Deka did not want to make a forecast for 2020. The economic consequences of the corona virus are not yet foreseeable, said the Deka boss. Deka is one of the largest asset managers in Germany. At the end of 2019, it was managing a good 310 billion euros. The recent stock market turmoil has reduced the value by around 25 billion euros.
Deka boss defends certificate strategy
Last year, the fund company, which belongs to around 380 German savings banks, earned slightly less than in 2018. The so-called economic result fell from 452 million euros to 434 million euros. The result was burdened by provisions for pensions. The economic result differs in some items from classic earnings indicators, for example in certain interest rate transactions.
In 2019, Deka raised a net 18 billion euros, significantly more than in the previous year. A good 11 billion euros of this came from private customers. They invested five billion euros in certificates and six billion euros in funds. Deka has only been issuing certificates for a few years, but is now the market leader in Germany according to the derivatives association DDV.
Consumer advocates repeatedly warn of risks of loss through certificates and sometimes consider the products to be too complicated. Stocker defended Deka’s approach: According to him, a small part of the certificates due in 2020 are currently in the red. It is about certificates with a volume of 350 million euros, which corresponds to 2.5 percent of the total volume of certificates of 14 billion euros. “The extent to which the nominal amount will still be repaid depends on how the market develops until the due date.”
A large part of the Deka certificates are interest-oriented and not related to the stock market, Stocker explained. Many share certificates, in turn, would have buffers and would run even longer. The certificates were deliberately chosen “so that extreme situations like now have a negative development”.
Dekabank expects the gross domestic product to decline by almost five percent in the current year. A plus is expected for the coming year. Deka chief economist Ulrich Kater said that if this happened, one would be confident that the Dax achieve 11,500 points again next year. The leading German index fell by a good 30 percent within six weeks. It fell below 8500 points at times, but has since recovered somewhat.
The corona crisis also has an impact on the desired consolidation of the top public law institutes: It is on hold for an indefinite period, as savings bank president Helmut Schleweis said just under three weeks ago. He has in mind that ultimately there is only one central institute for the savings banks. The starting point should be a possible merger between Deka and Landesbank Hessen-Thüringen, which is majority owned by savings banks.
The talks between the two Frankfurt institutes only started shortly after the beginning of the year. However, resistance from various sides within the Sparkassen-Finanzgruppe had become clear. There are currently four large Landesbanken: in addition to Helaba, LBBW in Stuttgart, BayernLB in Munich and NordLB in Hanover.
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