Investors in the open-ended real estate fund Uni:Immo ZBI Wohnen have to accept high losses. The portfolio of the fund, which invests almost exclusively in rental apartments, was devalued by independent experts by almost 17 percent or more than 860 million euros to just under 4.3 billion euros. The stock exchange listing of the fund even fell by 19 percent compared to the previous day. This is the highest daily loss suffered by investors in real estate investment vehicles since the fund crisis in 2008.
The fund is managed by ZBI Zentral Boden Gruppe Immobilien in Erlangen, which has been majority owned by Union Investment, the fund provider of the Volksbanken and Raiffeisenbanken, since 2020. ZBI initially did not inform about the devaluations on its website. Frightened investors therefore called the Volksbanken and Raiffeisenbanken in a panic. ZBI’s crisis communication was “catastrophic,” says an advisor at a Volksbank in the Hamburg area. Customers are extremely unsettled.
The European Central Bank’s massive key interest rate hikes to combat inflation since summer 2022 have significantly increased interest rates on real estate loans. In July of the year before last, the ECB began raising the key interest rate from zero percent to up to 4.5 percent in September 2023. “It was the fastest rise in interest rates in the past 60 years,” says Sinan Temelli, Head of Corporate Communications at Union Investment. It was only on June 6 of this year that the central bank lowered the key interest rate slightly to 4.25 percent.
“Rising interest rates create devaluation pressure for real estate,” says Sonja Knorr, analyst at the Berlin rating agency Scope. If borrowers have to pay more for the interest on their loans, this reduces the return on rental income. Accordingly, real estate is devalued by the independent experts who regularly assess the funds’ portfolios.
The devaluations have caused the returns of the open-ended funds to shrink significantly, mirroring the rise in interest rates. “The 22 open-ended real estate funds still achieved an average 12-month performance of 1.2 percent in 2023,” says Knorr. At the end of April this year, the 12-month performance had fallen to 0.5 percent.
Fearing devaluations, investors have started withdrawing capital from open-ended funds since the key interest rate hikes in 2022. However, since a law passed on July 22, 2013, they have only received the money after a twelve-month notice period. This is intended to prevent another run on open-ended funds like in the 2008 crisis. At that time, investors wanted to withdraw billions in one fell swoop. 17 open-ended funds had to be liquidated as a result. The bottom line is that investors lost around 8.3 billion euros.
The capital withdrawals triggered by the key interest rate hikes therefore only had an impact last year due to the notice period. According to an analysis by the Düsseldorf-based investment advisory firm Barkow Consulting, from August 2023 to the end of April this year, the funds had to record outflows of more than 2.1 billion euros. At the same time, the number of investors who wanted to invest fresh capital in the real estate funds shrank. “The negative trends in all three parameters – gross sales, net outflows and returns – are continuing,” says founder Peter Barkow.
However, the rise in interest rates alone does not explain the sharp devaluation of the properties of Uni:Immo ZBI Wohnen. This is because open-ended funds are only allowed to finance a maximum of 30 percent of their property purchases through loans. According to the most recent half-year report, the debt ratio of the ZBI fund was only 24 percent as of March 31.
However, the other open-ended funds, which mostly invest in commercial real estate such as office towers, hotels, logistics and shopping centers, have not experienced such massive devaluations. With the exception of KanAm’s Leading Cities Investment, whose portfolio was devalued by eleven percent last November.
The lower write-downs in most commercial real estate funds are the result of their index rental contracts. These contracts stipulate that rental income increases in line with the inflation rate. In the most recent Scope survey, the fund managers stated “that these rent increases can currently be implemented, which tends to increase rents and thus income,” says analyst Knorr. In residential rentals, on the other hand, such index rental contracts do not generally exist.
All commercial real estate funds of Union Investment Real Estate, the real estate fund subsidiary of Union Investment, have shown positive performance, says Head of Communications Temelli. The valuation results of the funds are balanced on balance compared to the past year.
The majority of fund managers are not particularly optimistic about the near future, as the latest Scope survey shows. “12.5 percent of respondents expect funds to increasingly report negative returns this year,” says analyst Knorr. A further 25 percent expect a return level between zero and 0.99 percent, 38 percent expect a performance of one to 1.99 percent, and the remaining 25 percent expect higher returns.
