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In recent months, Germany’s open-ended real estate funds have faced mounting challenges, from market devaluations to liquidity pressures and increasing investor scrutiny. Although these funds were once seen as relatively low-risk investment vehicles, recent developments are revealing an industry under strain, with significant implications for private and institutional investors alike.
In a significant move, Schroders announced in late-October that it would be suspending unit sales and redemptions for its open-ended real estate fund, Schroders Immobilienwerte Deutschland (SID). Launched in 2021, SID struggled to scale and diversify its assets amid an unfavorable market climate, holding only two properties by the time of suspension: the HGHI Tower office property in Berlin and the Multimini business park in Hofheim, near Frankfurt. A potential third acquisition, the UL Poll project in Cologne, fell through due to valuation discrepancies at year-end 2023, compounding Schroders' difficulties in building a diversified portfolio.
At the time of suspension, SID’s total assets stood at approximately €60 million, including significant institutional backing from Gothaer Versicherung and Schroders itself, yet had seen substantial devaluations in its core assets. Schroders plans to convert the fund into an open-ended special property fund, avoiding a forced sale of its assets but raising questions about the viability of new market entrants in the open-ended fund sector. The SID suspension highlights the fragility of new funds in a volatile market and the complexities of meeting regulatory asset requirements.
Schroders justified the step by saying that, in view of the significant increase in construction and financing costs, the public tranche of the SID "can no longer be continued in the liquid form of the OIF (open-ended fund) with adequate prospects of returns for private investors for the time being." Private investors are to be compensated at the net asset value at the beginning of March next year.
DWS’s Grundbesitz Europa facing devaluations amid high redemptions
Meanwhile, Deutsche Bank’s DWS Grundbesitz Europa, valued at around €8 billion, has experienced a steep decline in its valuation, now at a factor of 16.2, reflecting the challenges facing office and logistics properties in the current interest rate environment. The fund recorded a -4.9% performance as of September, and with over €900 million in sales since 2023, predominantly from logistics and office assets, DWS has been forced to prioritise liquidity over returns.
The DWS management, led by Christian Bäcker, has acknowledged the shift in risk profiles but emphasizes that “significant devaluations triggered by record interest rate hikes are largely complete.” DWS expects performance stabilization by 2025, provided redemptions do not surge further. However, independent observers like the leading consumer advocacy group Finanztip are less optimistic, advising caution for retail investors and warning of further declines if investor redemptions continue.
The influential Finanztip recently reiterated its call for investors to avoid open-ended real estate funds, citing the “high spread” between official redemption prices and the market value of fund units. The report, reflecting analysis on 20 open-ended funds, highlights a 12% average spread that Finanztip argues poses a hidden risk to investors who may face significant value erosion over time.
The organization’s lead analyst noted that “the redemption prices set by the funds may not reflect the full risk to investors, particularly given the 12-month notice periods and redemption values fixed well below market estimates.” Finanztip’s recommendation: avoid open-ended funds in favor of safer, more liquid options like fixed-term deposits. This warning comes as fund outflows continue, with €4.3 billion withdrawn in the last 13 months, reflecting growing investor uncertainty.
Union Investment's UniImmo-Fonds facing legal battle over risk misrepresentation
Adding further complexity, the consumer advice center of Baden-Württemberg has filed a lawsuit against Union Investment’s UniImmo Wohnen ZBI, a residential fund that has seen a sharp 17% devaluation. The suit contends that UniImmo Wohnen ZBI was misclassified in a low-risk category—levels 2 or 3—despite significant exposure to valuation shifts in a declining residential property market. Consumer advocates argue that the fund’s risk rating should have been significantly higher, in line with its underlying volatility.
Union Investment maintains that it adhered to all legal requirements in its classification, but the lawsuit has raised important questions about risk communication in open-ended funds. If successful, the case could set a precedent for greater transparency in fund ratings and an overhaul of how risk levels are presented to investors.
One of the most pressing concerns for retail investors is the perception that open-ended real estate funds represent a low-risk investment class, akin to government bonds. This perception is rooted in the funds’ historical stability, but as the financial crisis of 2008 demonstrated, market shifts can severely impact property valuations, leading to sudden declines in investor returns. Analysts now question whether German retail investors are adequately informed of the risks, particularly as open-ended funds face liquidity strains and market-driven devaluations.
Warnings about "low-risk" for the German retail investor
Finanztip’s warning is clear: “Retail investors must not mistake these funds for low-risk alternatives to government bonds, especially in the current economic climate.” With fund providers generally reluctant to increase risk ratings, the gap between investor expectations and actual performance may widen if market pressures persist.
Adding to these challenges, ESG compliance has become a growing focus in the real estate sector. The emphasis on sustainability requirements places additional pressure on fund managers to invest in retrofits and energy-efficient upgrades, especially for older properties. UniImmo Wohnen ZBI, for instance, has a substantial share of properties over 20 years old, which will likely require substantial ESG-aligned investments to remain competitive.
With Germany's open-ended real estate funds under pressure from - albeit stabilising - interest rate adjustments and tighter liquidity, investors should anticipate further recalibrations. Funds holding substantial office and legacy assets, or those lagging in ESG compliance, face particularly high hurdles. In the coming months, the industry’s success in preserving value will hinge on strategic asset sales and the ability to mitigate redemption demands. For seasoned players, the message is clear: assess portfolio resilience rigorously, as both returns and valuations are likely to be tested further.
