Meanwhile, the European Public Real Estate Association EPRA vowed to continue its campaign to “liberate the German market” from what it sees as an unhealthy domination of the sector by the open-ended funds at the expense of the stock-market listed sector.

The drive by Berlin to reform the GOEF sector has been gathering pace over the last two years, but has intensified since May of last year when original proposals emanating from Berlin led to a fresh wave of investor panic leading to fund withdrawals, and ultimately, the announcement of fund liquidation by three groups – Aberdeen Immobilien, Morgan Stanley and the KanAm Group. These funds are currently unwinding their positions and have announced a series of staggered payments over the next three years to their shareholders as assets are progressively sold off. This month saw shareholders in Aberdeen’s Degi Europa receive the first tranche of 20% of their fund’s (albeit shrunken, after heavy write-downs) total value.

A further nine real estate funds remain frozen to investor redemptions, in most cases availing of the maximum period of closure permissible under German law before having to declare whether they will re-open or likewise face liquidation.

The new regulations, which will come into effect in 2013, are designed to protect individual German investors, rather than the institutions who had availed of the funds’ structures to ‘park’ money in funds with short withdrawal notice periods. Increasingly disparate interests between the two groups and the threat of heavy withdrawals by institutions threatened the liquidity of the open-ended funds.

While in the past the funds had set and imposed their own rules on withdrawal, the new regulations will impose a cancellation period for investors of 12 months, with new investors subjected to a holding period of a minimum of two years, sources in Berlin said this week. Further reforms include only allowing investors to withdraw a maximum of €30,000 every six months, while foreign capital (the borrowing ratio) in any property investment would not be permitted to exceed 30% – as against the current 50% permitted by law.

Meanwhile, EPRA CEO Philip Charls made an outspoken plea last week to investors to support his organisation in its drive to boost what it sees as a “grossly undersized” listed real estate sector in Germany, and an unhealthy domination of the real estate sector in Germany by open-ended and Spezialfonds fund managers. These managers have about €90bn of property assets under management (of which about a third are currently frozen to redemptions), along with a further €50bn in an array of Spezialfonds.

Speaking at the EPRA Insight conference in Amsterdam, Charls stressed that there was a proper role for the German open-ended funds industry, but it must not be allowed to strangle the development of a healthy listed sector. The classic open-ended fund product was, he said, “an unclear product and it is quite often sold by misrepresentation to the customer.” The current industry structure made change difficult, he said. “We want to make clear that there is a way to live together to develop a proper listed sector and have the GOEF sector as it is. It is an uphill fight because the grip of distribution – the banks – is very strong. They make a lot of money selling GOEF units, a lot of money in managing them and they have very strong ties with the political system.”

While listed companies have a market capitalisation of about €10bn in Germany, or about 1.6% of the underlying real estate market, this compares unfavourably with the almost 6% represented by the listed sector in France and 4.2% in the UK, and to the European average of about 3%. “This should not be the case for the largest economy in Europe”

Charls rallied his audience by urging them to take all necessary steps to grow the listed German sector – “We are very excited that a lot of investors have already said they will be our allies and will march behind us to try and liberate the German market”.

Whether Charls succeeds in liberating the poor Germans from the intolerable yoke of oppression of the open-ended funds industry, it hasn’t been all fun and games for those hardy souls who’ve remained loyal to the funds sector through its recent troubles. A recent survey of fund managers Commerz Real, Deka Immobilien, RREEF and Union Investment would indicate that the recent upswing in commercial property markets has yet to manifest itself in payouts for sturdy savers. The funds association BVI said that the one-year returns on funds managed by the four surveyed companies ranged from 1.3% on Deka’s Westinvest fund to 3.3% at Commerz Real’s Hausinvest, well down on the usual 4-5% offered by the funds.

The funds offer no great hope of much of a change this year either, given the high liquidity reserves which they’ve felt obliged to hold, given investor nervousness. Union Investment said its funds were between 20% and 34% liquid, while RREEF and Deka also had liquidity ratios of more than 20% in most cases. All the funds are being noticeably coy in issuing statements about fund inflows and outflows, at least until the latest bout of legislation is formally enacted.

Funds association BVI also recently released statistics on the physical make-up of assets held by its open-ended fund membership. The figures show that the open-ended funds own 1,637 properties, with a total letttable area of 26.7m sq.m. and a market value of €87.9bn. Of all properties, 64.1% are less than ten years old, while 78.9% were built after 1995. In terms of usage, 63.3% of the assets were office space, while retail and hospitality (gastronomy) amounted to 20.1%. In terms of lease duration, between 10% and 11% of leases are due for renewal annually up till 2014, while 17.9% are not due for renewal until at least Jan. 1st 2020.

Related posts:

1. The importance of a good hedge, when doing God’s work
2. The nagging problem of German office vacancy rates
3. When I hear the word “Sustainability”, I reach for my revolver

Warren Buffett, not surprisingly, is siding with Lloyd Blankfein in Goldman Sachs’ trial before the Senate in the SEC civil suit against the bank. With his company Berkshire Hathaway earning $500m in annual dividends from its $5bn stake in the investment bank, what’s not to like about his partnership with the titans of Wall Street?  Besides, as he said last week at his annual shindig in Nebraska, he would never assume to second-guess what investors on the other side of a trade he was involved in were thinking.  “They could very well be shorting a product, they do not owe us a divulgence of their position more than any reason why we need to explain what we are doing with our position.”

The Sage of Omaha is perhaps being a touch disingenuous, given his stake in the outcome and in the alleged perpetrator.  However, as a trader, he’s fully aware that moral compunctions have no place in the decision as to WHEN to enter or exit the trade.  We suspect that his views might be a little more tempered if he was paying advisory fees to the bank, presumably to act on his behalf, only to have them trade against him.

In the decisive moments of the trial, four key Goldman executives were repeatedly asked the question – Did you have a duty to act in the best interests of your clients?  Three equivocated, refusing to commit to a ‘yes’ or a ‘no’.  Only the fourth, the pivotal witness ‘Fabulous’ Fabrice Tourre, was upfront.  “I do not believe we are acting as investment advisers for our clients”, he stated.  Loud and clear.

Further questioning of more senior executives, including CEO Blankfein, failed to elicit a committed answer to the question, “Do you think Congress should impose a clear fiduciary duty on brokers to act in the best interest of clients?”.  Mumblings, but no response.

Many in the financial community are not shocked by this.  Whatever the outcome of the Senate’s findings, the Masters of the Universe at Goldman Sachs are likely to escape with a peremptory fine and a sharp rap on the knuckles.  At an average bonus of $1m per employee in the bank’s London offices, most are expected to survive the bruising to the bank’s reputation.  Robust resilience, and all that.  After all, nobody ever said that ‘doing God’s work’, to quote Blankfein, was easy.

What surprises us at REFIRE is the outrage that is greeting the Goldman Sachs disclosures.  Goldman may be the Master Vampire Squid, but in the rarefied world of private equity investing, where the punters pay hefty premiums for blue chip banking names to likewise ‘relentlessly jam their blood funnels into anything that smells like money’, they are not alone.

Take Morgan Stanley, the erstwhile 800- pound gorilla in German property investing.  In 2007, the bank invested €10.5bn in Germany alone, making it by far the country’s biggest property investor.  Several times then and before, REFIRE had listened to and questioned John Carrafiell, Morgan Stanley’s head of real estate worldwide and the man who set up the ill-fated MSREF VI Fund, as he justified paying premium prices for trophy German properties – despite frequently high vacancy rates and vulnerable tenancy agreements.

Last month investors stared aghast at the disaster wrought upon them by their alpha seeking ‘partners’ at Morgan Stanley, who had managed to lose $5.4bn of their $8.8bn equity.  The fund, with its ‘enhanced return strategy’, had buying power of more than $30bn in 2007.  This fund volume includes many of its German trophy acquisitions, now being sold off one after another at a loss, or which have been completely written off, with the keys in the post on their way back to the lender.

This destruction of investor wealth is staggering, even by recent standards.  What on earth could have led these hard-bitten real estate professionals to spend so much above what would be mathematically justifiable, and to barge in waving thick wads of cash where angels truly would have feared to tread?

Well, let’s see.  The Wall Street Journal has uncovered documents that show what Morgan Stanley charged for the ‘promote’, or fees to manage Other Peoples’ Money in the MSREF VI fund.  Just in 2007, these came to $104m in acquisition fees, $22m in fund management fees, $13m in financing fees, $36m in real-estate management fees, and $21m in financial advisory fees.  There’s your alpha returns right there.  For the promoter, of course.  Not the investor.  To no great surprise, the investing public is left wiser, more experienced – and wiped out.

The Morgan Stanley losses, along with those suffered by Goldman Sachs’ Whitehall Funds and RREEF, to name just two others who have taken a financial bath recently, will be written off, along with a certain loss of face.  The banks will recover.  The managers involved, unlikely to be personally out of pocket, have mostly already moved on to manage other funds.  The show will go on. 

Others can (and do) reflect on the positive side of the arrival of all that fresh money.  The German open-ended funds were big beneficiaries of the folies de grandeur indulged in by the living deities.  In a stroke of perfect timing, the funds managed to shift most of their unwanted properties into the hungry maws of the highly leveraged Anglo-Saxons, and were away scot-free, as it were.  (No disrespect – or pun – intended to RBS, who just happens to be left holding the can in both the Goldman Sachs trial and the Morgan Stanley ‘jingle mail’ Pegasus portfolio debacle).

The big German funds are now the new powerhouses, flush with investors’ euros and welcomed across Europe with open arms (and pockets).  For now, nowhere is the welcome likely to be bigger than in Athens (we’re dismissing, as an apocryphal tale, the report of a Berlin taxi driver who recently refused a colleague’s Greek euro coins when paying his fare…)  In fact, we’re betting on gift-bearing Germany’s popularity remaining high for some time to come, as an investment and currency hedge.  Ceteris paribus, we too would be favouring those euros that have some residual Deutschmark genes in their DNA.  But that’s a whole other story…

Related posts:

1. When Masters of the Universe resort to Jingle Mail, listen up
2. EPRA to the rescue as German government amends GOEF rules
3. When I hear the word “Sustainability”, I reach for my revolver

Like “liberty” or “justice”, the concept of sustainability threatens to become nothing other than a feel-good buzzword with no real meaning or substance.  If,  two years from now, the talk is still all about sustainability, it will be obvious that we are still in a deep and ongoing recession, and the real estate industry hasn’t come up with significant new ideas to get the markets moving again.  Sustainability will still be top of the agenda, but green-fatigue will have to be countered by specific commercial marketing of the individual merits of a waste-reducing, energy-efficient, employee-friendly building that can provide solid financial returns to investors and tenants. It will soon have to be more narrowly defined, if it is to continue to have any meaning.

Now, don’t get me wrong.  Sustainability, in all its facets, is indeed an admirable goal and clearly more than just a passing fad.  At a recent conference I was chairing on corporate real estate, the senior managers on the discussion panel all confirmed the key role that sustainability now plays in their decisions.  The impetus is coming from big enterprises, with their corporate mission statements committing themselves to the highest standards of green and eco-friendly manufacturing.  A Google or a Coca-Cola, or any leading consumer products company, will now never move into anything other than a state-of-the-art sustainable building, given the potential negative impact on their bottom line.  With the world-wide threat of lower consumer spending looming, the perception of health and eco-friendliness associated with their products is their business raison d’etre, their very life-blood.

By contrast, the real estate industry, until recently bedazzled by the glare of abnormal financial returns, is scrambling to catch up.  But it’s scrambling fast, and never faster than in the last twelve months, as it seeks to jump aboard the great sustainability gravy train.

If anything, the priority given to sustainability has risen markedly since the onset of the financial crisis.  Given the extra costs involved in improving energy, water and material efficiency, this may come as a surprise in these cash-strapped times.  In fact, it’s likely to prove the catalyst in shaking out the older, financially-engineered speculative investors in the recent boom years, from the new wave of capital that will drive property markets into the next upswing.  With the current over-supply of office space in Germany’s leading cities, owning outdated and energy-inefficient properties will not be an enviable place to be for investors who are short of capital.  That’s a lot of investors.

We all now know that buildings use 40% of the total energy consumed in the US and Europe, and are responsible for 38% of carbon dioxide emissions – far more than all the cars, ships and jet airlines that criss-cross our highways and continents.  The sustainability industry can look forward to years of lucrative contracts in reducing the environmental impact on buildings.  These specialists are already proving the beneficiaries of this new awareness, hiring staff and expanding into overseas markets, while the ‘classical’ real estate industry continues to shrink and consolidate.  Accountants and other cost-cutting specialists are enjoying a new field-day, while over-leveraged investors with over-priced investments are trying to come to grips with the changed environment  Under water and faced with higher bank charges, for them, clearly, the situation will soon prove unsustainable.

Related posts:

1. EPRA to the rescue as German government amends GOEF rules
2. The importance of a good hedge, when doing God’s work
3. Whatever happened to that wave of distressed selling?