Time short for frozen German prop. funds
FRANKFURT/LONDON (Reuters) - Germany's crisis-hit open-ended property funds are bracing for a red tape revolution this autumn that may alienate key investors and spark sector consolidation, consigning smaller funds to an uncertain future.
KanAm Group, Aberdeen Immobilien (ADN.L) and Morgan Stanley (MS.N) are among those battling to manage fund redemptions as financial watchdogs mull new rules that may repel institutional clients and spark a further, and fatal, outflow of cash.
October brings the final two-year legal deadline for the re-opening of frozen real estate funds that barred investor exits to prevent a glut of asset fire sales at the peak of Germany's banking sector crisis in autumn 2008.
"There are a lot of investors in those funds who have been waiting a very long time to have their units redeemed," said Simon Mallinson, head of European research at Invesco (IVZ.N).
Several funds extended their ban on exits in winter 2009, citing insufficient liquidity, but the law only gives managers two years to raise the necessary cash to pay out investors.
Figures from the federal authority for investment and asset management BVI.L show Germany's 87-billion-euro open-ended property fund sector attracted 2.7 billion euros of capital in the year to date. Combined year-to-date inflows of the three funds due to reopen next month is just 338,000 euros.
"It is definitely possible that these frozen funds will be liquidated," DZ Bank analyst Hasim Senguel said.
Morgan Stanley's 1.1-billion-euro P2 Value Fund is one such fund considering its options, experts told Reuters.
"Having seen how aggressive they were in marking down their assets, and making the decision to stop selling units, I suspect they are much more ready to sell off assets and perhaps even wind down that fund," Iryna Pylypchuk, an analyst at real estate broker CB Richard Ellis CBRE.L (CBG.N), said.
Morgan Stanley declined to comment. Aberdeen did not respond to Reuters enquiries. A KanAm spokesman was more responsive.
"We believe the conditions for a possible liquidation are a lot better now than they would have been at the end of 2008 or 2009. Our priority is creating enough liquidity," he said.
Open-ended property funds, from which investors are supposed to be able to withdraw money at any time, have proved popular among German savers, but some experts fear recurring bans on redemptions have tarnished their image beyond recovery.
Sources familiar with the situation told Reuters the German government has drafted a new law that will enable investors to pull out money whenever they wish, on the condition they do not withdraw more than 5,000 euros a month.
Experts also suggested regulators could propose a temporary extension of the freeze period, while new regulation designed to restore investor confidence in the sector is rushed through.
The regulators "might also decide to extend the deadline and continue the closures but that might not sit well with the German psyche," said Tim Horrocks, head of Germany at fund house Henderson Global Investors, a unit of Henderson Group (HGGH.L).
The German finance ministry and BVI declined to comment on the speculation, as did the federal financial watchdog BaFin.
Senguel said proposals to limit redemptions were "sensible". Invesco Research analyst Matthias Naumann said some reforms to protect retail investors may ultimately repel larger investors.
"The rumour ... is that these funds will become less attractive for institutions to invest in. They are not allowed to park money (in these funds) for a few weeks or months anymore and they are less flexible," Naumann said.
If institutional investors desert open-ended property funds, annual sector inflows could drop sharply, triggering a 'survival of the fittest' scenario that could increase the dominance of what commentators call 'the Big Four' over their smaller rivals.
These elite fund managers RREEF (DBKGn.DE), Commerz Real CBKG.DE, Union Investment and Deka, tend to have fewer liquidity crises by virtue of their links to heavyweights such as Deutsche Bank and the Sparkassen, which provide distribution channels broad enough to keep fund inflows stable.
Fortunately for managers who may be considering winding up smaller products, the well-let, prime properties typically owned by open-ended funds are the market's most sought-after assets, DEKA bank board member Matthias Danne said.
Experts believe some troubled funds could even make a profit upon liquidation if they are sensible on asset price.
"There seems to be a large amount of uninvested capital chasing good assets, which most of these open-ended funds have," Horrocks said, adding that Henderson had more than 1 billion euros of firepower for German property buys.
Horrocks believes Germany will find a smooth resolution for the situation, whether problem funds are wound up, merged with stronger peers or pushed to sell assets.
"The U.S. government let Lehmans go, but here in Germany, Germany Inc. found a solution to stop a similar doomsday scenario unfolding," Horrocks told Reuters.
"I think that's the attitude that will prevail here." (Additional reporting by Kirsti Knolle in Frankfurt; Editing by Andrew Macdonald) (See www.reutersrealestate.com for the global service for real estate professionals from Reuters)
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