How the corona crisis affects open-ended real estate funds

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


Corona meets the real estate world

Erfurt Shops have to close, trade fairs are canceled, rows of office workers are ordered to their home offices, industrial production sites are shut down, thousands of people are sent in short-time work – it is becoming increasingly clear that the economic consequences will also affect the real estate world as a result of the corona crisis. It is difficult to assess the concrete consequences. Nevertheless, the industry could even benefit from the crisis.

The consequences are most evident in retail properties. In many countries, including Germany, governments have ordered most of the shops to close. Stefan Genth, the managing director of the HDE dealer association, estimates that non-food retailers lose EUR 1.15 billion a day. In three to four weeks there could be bankruptcies, he says in an interview with the “Frankfurter Allgemeine Zeitung”.

The owners of the commercial real estate must also adjust to this. Earlier this week, Unibail-Rodamco-Westfield (URW), Europe’s largest shopping center operator, issued a message to its investors. The group is in dialogue with its tenants. But at the moment it is still too early to see the consequences for your own business. URW has property assets of EUR 66 billion. The share has lost two thirds of its value since the beginning of the year.


The SDax company German Euroshop wants to cut the dividend as a precaution. The share has lost 60 percent of its value since the beginning of the year. Shopping center operators are also feeling the loss of sales at retailers. Rents that are linked to sales are common in this area. “There is often a basic rent plus a share of the success in sales,” explains Birger Ehrenberg, CEO of the Federal Association of Real Estate Investment Experts (BIIS). The owners could cope with the temporary loss of rent, says Ehrenberg. “The real risk is bankruptcy of the dealers,” he says.
Retail owners had previously suffered. This is shown by the current ZIA-IW Real Estate Mood Index (ISI): At the beginning of the year, the situation fell by 30 points to only 65 points. Overall, the barometer ranges from minus 100 to plus 100 points. The mood has probably deteriorated further.


How quickly the situation is changing is also felt by Hans Volkert Volckens, Head of Real Estate at KPMG. The industry was still negotiating deals two weeks ago. But now the requests from clients for support in the crisis have increased significantly. Volckens urges prudence. “The companies now have to soberly analyze their portfolio and tenant structure, assess possible rental losses and weigh up their own financial risks overall,” says Volckens. The need for advice in the hotel sector is now “intensive”. This is often about securing liquidity in the company. That is what the Reutlingen hotelier Hans Joachim Neveling demands. He operates five hotels in Baden-Württemberg, two of which he has already closed temporarily, and short-time work applies to three properties. In his Reutlingen hotel, he otherwise has 95 percent business travelers. Of the 160 rooms there, twelve were still occupied.

Deals under pressure

According to media reports, the Bavarian Chamber of Supply has imposed a stop of at least four to six weeks for investment decisions in the real estate sector. Deals will continue to be reported. In most cases, however, these were threaded in before the corona crisis. In the background, investors explain that new business is often severely hampered. “Visits no longer take place,” says an insider.

In addition, legal uncertainty is spreading on the real estate market: what happens if a tenant can no longer pay rent due to the crisis? The German Tenants’ Association and the GdW have called for an aid fund to protect tenants and landlords against potential loss of rent if tenants struggle with lost income. Vonovia and German living, the two largest landlords in Germany, have declared that they will support their tenants. Lawyers such as Julia Haas, partner and real estate law specialist at the Freshfields Bruckhaus Deringer law firm in Frankfurt are also feeling the increasing need for advice from tenants and owners. “Our clients are primarily concerned with the topic of rent reduction,” says Haas. For example, the question arises whether tenants can reduce the rent due to a lack of rent or a disruption in the business situation. There is no general answer. “In principle, however, the use risk of the property lies with the tenant,” explains Haas. That means: If the operation is restricted by official requirements, this is initially a problem for the tenant, not the landlord. However, it could become a landlord problem if the building becomes unusable due to certain property-related defects. At the moment, however, it can also be seen that landlords and tenants agree on the question of rent payments in order to cushion emergencies. The city of Hamburg has instructed its real estate companies to offer commercial tenants a three-month delay in rent payments if necessary. “In the private sector, rent deferrals are also agreed where it appears necessary,” says Haas.

Even with Gerhard Molt, specialist lawyer for tenancy and residential property law at the law firm Eversheds Sutherland, “the phones are running hot”. In addition to tenant rights issues, building contractors face challenges: Molt says there are already significant disruptions on almost all major construction sites. Skilled workers from the Czech Republic, Poland, Italy and many other countries can no longer enter the country, and there are sometimes supply difficulties with special components. “You will have to look closely at the delays and additional costs that are actually caused by the corona crisis and which problems actually have other causes,” says Molt.

In return, the expert Ehrenberg does not expect abrupt price drops in property valuations. This is good news for private investors who have invested their money in open-ended real estate funds, for example. “Real estate is not valued on the stock exchanges like stocks on a daily basis, but rather sustainably and on fixed deadlines,” says Ehrenberg. This leaves room for hope: If the spread of the corona virus can be curbed, the consequences for property values ​​could remain manageable.

In case of doubt, the real estate market could also benefit from the crisis: central banks have lowered their interest rates and relaxed monetary policy. Until the very end, this was the basis for the real estate boom. “Once the current state of shock is over, it is likely that demand will pick up in many real estate segments,” said Ehrenberg.

More: Six things the ECB wants to calm the financial markets with.