Real estate funds have rental problems

For the first time since 2011, the letting rate of open-ended real estate funds has fallen in the corona crisis. The rating agency Scope is now downgrading six of 15 funds – one even comes up with a negative return.

The hotel market is currently difficult, says Scope - especially in New York.

Dhe corona pandemic has turned the trend in real estate funds: For the first time since 2011, the fund’s letting rate is no longer increasing – it is falling. With 94.3 percent rented properties, it is still at a high level. But the development since the beginning of the pandemic differs significantly from previous years. Year after year, the funds were able to better utilize their skyscrapers, apartment blocks and commercial properties. Now rental is falling for the first time in this decade.

Sonja Knorr, specialist for open-ended real estate funds at the Scope rating agency, made two phenomena of the corona crisis responsible for this in an interview with the FAZ: On the one hand, there are difficulties with the hotels because people have not been able to travel for so long, because holidays were not possible, and many business trips canceled and there were hardly any trade fairs. “Some hotels in America in particular have lost their tenants in this process,” said Knorr. In addition, there is a structural change in shopping centers that was already evident before the crisis. Especially among medium-sized centers, some could even disappear from the market, said Knorr. On the other hand, many funds switched from commercial to residential real estate precisely because of the crisis. In the large apartment blocks in the middle price segment, however, there is always a higher vacancy rate than in commercial real estate – this segment apparently seems safer to some fund companies at the moment.

Uni-Immo-Global downgraded

Scope has now downgraded six out of 15 open-ended real estate funds for private investors. That is an unusual amount. While the large Hausinvest fund from the Commerzbank subsidiary Commerz Real retained its rating, all three real estate funds monitored by the Volksbank fund company Union Investment were downgraded: Uni-Immo Deutschland, Uni-Immo Europa and Uni-Immo-Global. With regard to the rating with the grade “bb”, the latter is now the worst at Scope. The rating spectrum ranges from “a +” to “bb”, the average is “a-“. The Grundbesitz Europa fund of the DWS fund company was also given a lower rating than before, with “bbb +” being awarded.

According to Knorr, the main reason for the fund downgrading was the return profile. While the 15 funds achieved an average of 3.2 percent in 2019, it was only 2.1 percent in 2020. With Uni-Immo Global, there was even a real estate fund that had a negative return for the year. “That is remarkable,” said Knorr. The background to this is the fund’s comparatively strong involvement in American hotels. “In New York in particular, the hotel market is very difficult right now,” said Knorr. The range of fund returns over the year ranged from minus 1 to plus 5.1 percent, with an average of 1.9 percent. For the full year 2021, the Scope analysts expect an average return of around 1.5 percent. “That is of course still subject to how the corona crisis will continue,” said Knorr. In the longer term, however, the return will probably rise again.

According to Knorr, the issues of sustainability and ESG (“Environment, Social, Governance”) are also playing an increasingly important role at real estate funds. Younger investors in particular placed great value on environmentally friendly real estate funds, and advice on old-age provision will in future require more commitment and transparency in matters of sustainability. According to a survey, the majority of the funds are striving to be classified as so-called “Article 8 funds” and thus as “sustainable funds”. So far, seven funds have achieved this. According to a survey, fund managers see “more transparency” on sustainability criteria (62 percent) and the reduction of CO2 emissions from their properties (48 percent) as important steps in this area. Less mentioned social aspects (26 percent) and ESG-compliant rental agreements (12 percent).

Overall stable in the crisis

The trend towards home office from the time of the pandemic could also have lasting negative effects on the profitability of office properties, say the Scope analysts. However, one does not assume that vacancies in the Class A office segment, which made up a large part of the fund portfolios, will rise permanently. “The risk of rising vacancies mainly affects properties in less attractive locations,” says Scope.

The inflows into the real estate funds had recently been somewhat subdued – but the interest of the investors was still there: From a “flight” from real estate funds nothing could be observed, said Knorr, even if there were outflows with individual funds on the line. Overall, the real estate funds have proven to be relatively stable during the Corona crisis. However, the net inflow of funds fell from 10.4 to 7.8 billion euros in 2020. As before, however, many fund companies regulate who is allowed to participate in real estate funds at all; partly through quotas that are given to their sales partners, for example in the bank branches, partly through temporary closures for new funds. Of the funds monitored by Scope, only six are currently freely available; the others work with quotas or other funding restrictions.