In my portfolio I am holding a number of real estate funds which are currently in the divestment phase returning the proceeds to shareholders. Many readers might be aware about my series of write ups on the Italian closed end funds, which I started earlier this year. In addition to that, I published some posts about two German open-end funds in 2014.
In Germany open-end real estate funds play an important role in providing retail investors an opportunity to invest in commercial real estate. However, it turned out that the structure of open-end real estate funds is not working at all in periods of market distress.
In 2008/2009, large withdrawal of capital from open-end real estate funds started and triggered a liquidity shortage at many funds. Therefore, these funds had to suspend the redemption of units. Based on legal provisions, this suspension could only be done for a maximum of two years. After this time period, most of the closed funds were not able to reopen. As a consequence, their managers terminated their mandate with a three year notice. During this three year period, the fund manager has to sell all the fund’s assets and distribute the generated liquidity step by step to the investors. If the fund manager cannot sell all assets within the three-year period, all remaining assets will by law be transferred to the fund’s custodian bank, which then has to liquidate the assets and distribute cash to the investors.
In both cases, TMW Weltfonds (TMW) and Axa Immoselect (AXA), I invested when the funds had reached the end of the 3 year liquidation phase. At that time unit prices were reflecting the uncertainty regarding the consequences of the transfer to the custodian bank and a potential fire sale of the funds’ remaining assets. However, as it turned out, the funds’ largest and most important properties in terms of NAV were sold close to book value with some smaller properties being sold at larger discounts to appraisal value. As a consequence, both funds’ unit prices have appreciated since my investment.
Currently, TMW has only two assets left, one in the Netherlands and the other in Italy. In both cases a divestment might take quite some time due to market conditions in the Netherlands and a dispute with the tax authorities in Italy. In addition to that, it is uncertain when the fund’s cash holding will be distributed to unitholders due to warranties given to buyers.
After the sale of their largest property in Düsseldorf, Germany, Axa has seven properties left across Europe. I do not believe, that investors are going to lose money by keeping their units in AXA. However, at the same time I think that the upside is now limited given that the liquidation might still take a couple of years and therefore will lead to low single digit annual returns going forward.
Consequently, I decided to sell my exposure to German open-end real estate funds starting on Friday realizing a total return of roughly 18% (IRR of 17%) in the case of TMW and roughly 10% (IRR of 16%) in the case of AXA.
The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always please do your own research!