German Open-Ended Fund Set to Capitalise on Credit Crisis
€25 billion spending potential by GOEFs over next two years
With existing high liquidity and projected cash inflows of €7 to €8 billion in 2008, the German Open-ended Funds (GOEFs) could potentially invest as much as €25 billion in the global commercial real estate market over the next two years, according to a new report by CB Richard Ellis Group Inc. The GOEFs’ unique characteristics as equity-rich, risk-averse investors give the sector heightened strength in today’s credit-scarce business climate.
According to the report – German Open-ended Funds: Past, Present and Future – Europe will remain the key target for the funds. Approximately 85% of their €25 billion two-year potential purchasing power will stay on the continent, of which 20% will flow towards the home market – Germany. Europe’s mature, liquid markets are set to benefit the most. For example, UK and Sweden combined are likely to attract some 15% of the GOEFs’ total Europe-allocated purchasing power. With initial yields currently above 5% (the level of returns targeted by the GOEFs), the Central London market continues to attract interest with many GOEFs currently very active there. Having invested €860 million in the UK in the first half of 2008, the GOEFs are one of the largest investors in Central London this year.
The GOEFs are likely to allocate 15% of their purchasing power to Asia and the Americas to continue their global diversification, as the current non-European share of the GOEFs’ total assets under management is still low at 8.5%. Asia has become increasingly interesting to the funds, especially now that the use of indirect investment vehicles has been made possible. Therefore it is likely that 10% will be targeted at Asia.
Iryna Pylypchuk, Senior Analyst in CB Richard Ellis’ EMEA Research & Consulting team and author of the report, explained: “One of the key drivers behind the strong acquisition programmes of the GOEF sector is their very high levels of liquidity. At February of this year, the level of liquidity had reached around €22 billion, which represents around 27% of their total funds under management. Even though they have been very active buyers over the past six months, with global purchases totaling more than €5 billion, net cash inflows during the first half of 2008 stood at more than €4 billion, followed by further €1.2 billion in July alone. Consequently, by the middle of 2008, they had only eroded their ‘cash’ position by €1 billion, with their liquidity level almost unchanged at around €21 billion. As the more leveraged buyers have withdrawn from the market, these equity-rich investors have strong buying power and are set to remain very active in Europe in the short-to-medium term, both in absolute terms and most certainly as a proportion of overall market activity.”
While the GOEF sector – with a current gross asset value of approximately €105 billion – appears not to have been directly affected by the credit crunch, it has reacted to the shifting economic landscape by adopting an even more conservative approach to investment. Thus it tends to purchase only core, prime assets, especially those offering security of income stream, low vacancy and longevity of investment. Offices – the GOEFs’ historically preferred sector – continue to be in favour and are likely to remain so in the short-to-medium term.
Nick Axford, Head of EMEA Research & Consulting, CB Richard Ellis, said: “The changes which the GOEF sector has undergone since 2006 have been sweeping. A combination of market forces - major selling and restructuring over 2006 and 2007 - and amendments to German legislation which afforded the GOEFs greater flexibility, have helped the GOEF sector grow into a major force in the global investment community. “The industry has changed from being largely domestically focused a decade ago, to one of the most prominent buyers in the global investment market, uniquely placed to take advantage of the current market conditions.”
Pavel Schanka, Associate Director, CBRE Central & Eastern European (CEE) Capital Markets, said: “GOEFs are the leading investors in CEE at the moment, achieving a market share of 25% in H1 2008. Diversification potential, changed German legislation and strong market fundamentals in CEE were drivers behind their increased deal flow in this part of Europe. The fact that this traditional type of investor remains an aggressive buyer shows confidence in the future of CEE property markets.”