Nearly €30bn of German property funds were frozen between Tuesday and Friday last week in what industry experts fear could foreshadow a UK commercial real estate collapse.
A series of "open-ended" – meaning that investors can withdraw their money whenever they choose – property funds were temporarily shut down, including those run in Germany by AXA, UBS and Morgan Stanley.
The 11 funds involved suffered from a string of major investors pulling their cash to raise liquidity. In order to redeem the money, the funds have to sell assets in their property portfolios, which is costly as the real estate market is in freefall. The funds responded by not allowing redemptions for three to six months.
According to data provided by the BVI, which represents the German investment fund industry, 10 of the funds asset values were worth €27bn combined as of 30 September. The remaining fund, run by Catella Property Group, is worth €390m.
The move is significant for the UK, as German funds have been among the most active in snapping up City of London and West End properties this year. A leading financial restructuring expert said that similar problems are likely to hit UK property funds. "Commercial real estate is going to be the really big sector for our line of work in 2009," he said.
A commercial property analyst said: "German funds are big buyers of London offices. They were forced to sell assets, and the funds would have closed down, had they not implemented the freeze."
Stefan Seip, director general at the BVI, said this was the worst week for fund closures he could recall. "We have never had a situation comparable to this," he said: But he denied the German market was in long-lasting trouble: "To a lesser extent, losses in equity and bond investments led to an over-allocation in real estate and the need for rebalancing these portfolios. In this way, the open-ended real estate investment funds became a victim of the crisis."
DEGI, a part of the London-quoted Aberdeen Asset Management, was the last of the 11 funds to close, late on Friday afternoon, when it froze two of its four German-based funds: DEGI Europa and International, worth €4.3bn combined.
In a statement, DEGI said: "Many investors started to meet their liquidity needs by redeeming their shares in, then as now, profitable and stable investment vehicles, which include open-ended property funds. For this reason, open-ended property funds have been experiencing above-average unit redemptions, and in consequence a shrinking of their liquidity."
DEGI has suspended redemptions for three months, "for the time being".
Catella said it had suspended redemptions "for the protection of its investors", stating the freeze was a response to temporary closures, which were a result of a loss of confidence in such property funds. Catella's fund, "Focus Nordic Cities", for example, had "registered an unusually high number of redemption requests, which the fund management found impossible to meet with the available cash on hand".