Hurray, the rent is increasing!

Open-ended real estate funds are increasingly buying apartments instead of office towers. That’s a good thing for investors.

Rental apartments sometimes do well in a real estate fund.

Wohin with all the money? This is not only a question for savers who are looking for returns in times of low interest rates. The managers of open-ended real estate funds, who would like to receive money from savers, but do not do so because they cannot invest it profitably, are also asking themselves this question. Because the fund companies can no longer find enough buildings that are attractive, affordable and promise an adequate return. The fact that nobody can do what they want is called an investment crisis in the financial sector. “This emergency makes fund providers and investors more imaginative,” says Stefan Mitropoulos, real estate analyst at Landesbank Hessen-Thüringen.

The latest way out of the investment crisis in open-ended real estate funds does not sound overly imaginative at first: residential buildings should be the solution. After looking for chic office towers, good hotels and useful warehouses in the past few years, the fund companies are now looking around the housing market. In a survey by the rating agency Scope, 74 percent of the fund managers stated that they would primarily want to buy residential property in the next three years, significantly more than office buildings (58 percent) and other properties. In this way, managers of open real estate funds want to increase the negligibly small proportion of residential property in their existing portfolios. On the other hand, large fund companies such as Union Investment and Deka have recently launched funds that focus entirely on residential property and are therefore open to fresh money from savers.

Avoided for a long time

This approach is actually obvious at a time when people are desperately looking for affordable housing, especially in metropolitan areas. Well-funded fund companies can do their part to alleviate the housing shortage by buying and condensing existing apartment buildings or residential complexes or by acquiring and building new land. A look at the MSCI Real Estate Index, which takes rental yields and increases in value of the various types of use into account, shows that residential buildings can be a lucrative investment. In 2018, the small logistics segment in Germany was ahead of the index with a plus of 15 percent, while Wohnen achieved the second-best result (10.8 percent). It was only followed by offices (10.6 percent) and retail (7.7 percent), which make up the largest share in most open-ended real estate funds.

There were good reasons why fund companies kept their hands off German residential real estate for years. On the one hand, investors have to be very familiar with the market conditions, for example with the local rent index, a rent brake and energy regulations. On the other hand, residential buildings with many tenants are more difficult to manage than an office building in which at most a few companies reside. “In the residential real estate segment, you have to be deep in the market and close to the tenant,” says Scope analyst Sonja Knorr.

Those who meet these requirements are specialized housing associations. This includes the company Wertgrund, which in 2010 was the first to launch an open-ended residential real estate fund. As a pioneer, the “WohnSelect D” achieves excellent returns: it was 8.9 percent in the past twelve months and 58 percent in the past five years. If you want to buy shares now, you have to register and be patient: Since 2016 the WohnSelect D, which with its 2,000 apartments and 100 commercial units in six cities is one of the smaller of its category, has not been accepting any more money.