In the low interest rate phase of the 2010s, real estate funds were an attractive form of investment for institutional investors. While capital collectors strategically increased their real estate quotas, real estate investments in Depot A made it possible to generate attractive returns in the environment at the time, in which lending was difficult. This has changed dramatically since 2022 with increased inflation and sharply higher interest rates.
Many credit institutions, as well as savings banks, are now faced with the task of adjusting their portfolio A: the new interest rate environment, the stricter regulatory framework (keyword: CRR III), the yield developments of the funds with in some cases significant devaluations of real estate, as well as increased requirements for liquidity, risk capital and flexibility in order to counter the multiple geopolitical crises, make a critical examination of portfolio A no longer only sensible, but necessary.
Consequently, the desire to part with real estate funds is growing among many banks. Since many of the standstill agreements concluded in the last two years will expire this year, the willingness to sell real estate funds is likely to increase further. Often in the past, this led to a domino effect and a single termination led to the termination of all investors in the fund. This presents asset managers with the major challenge of selling the underlying properties within three years in accordance with the requirements of Section 257 KAGB and winding up the fund. It remains to be critically questioned how the phase, which can last up to five years, is to be assessed by the risk management of the respective institution.
A structured, discreet and at the same time market-friendly alternative, on the other hand, is offered by the secondary market, which is advantageous for all parties.
Secondary market as an alternative to termination
While the retail banking market is already established and has a high degree of standardization on digital platforms, secondary market trading for institutional investors is on the upswing.
The main difference here is that the distribution of special funds can be tailored to individual needs and is often accompanied by competent external advisors. Individual advice in advance, discretion in the market approach and transparency about the sales process as well as a coordinated and compliance-oriented approach are central to institutional players. The harmony of the different interests of sellers, buyers, but also asset managers and capital management companies are the core of trading special fund units via a secondary market.
It should be emphasized that when external consultants are involved, only purchase bids are queried on the market and the selling party is only named in the last phase of the process. Documents are only made available in a multi-stage process via a closed data room against the signing of a confidentiality agreement and only if there is a specific interest. This ensures discretion and the seller retains control over the procedure, unlike after a notice of termination.
For Depot A managers who are willing to sell, this means the opportunity to implement their strategic realignment without triggering distortions in the fund or taking on reputational risks. Brokerage via the secondary market also usually works faster than the legally defined and contractually agreed redemption of shares.
The asset manager takes on a supporting and accompanying role in the process and, if requested by the client, is kept informed about the progress of the process.
Selling prices are approaching market-adequate return expectations
While in the past transactions often failed due to the different price expectations of fund sellers and prospective buyers, we are increasingly seeing a willingness to sell fund participations at mid-double-digit percentage discounts, depending on the types of use, and on the basis of already reduced fund valuations. There seems to be a realistic realization on the seller’s side that, unlike in 2011, values will not reach the old highs again as they did before the crisis by simply waiting. The framework conditions are different today. Low interest rates or even negative interest rates as “medicine” are not to be expected in the short term.
Opportunities for buyers
On the buyer side, the secondary market in turn creates attractive opportunities to invest in existing funds with an existing real estate portfolio and a reliable track record of the asset manager. Certain types of use or regional weightings can also be added in a targeted manner, also to reduce risks in Depot A. Especially in market phases in which institutional sellers withdraw for strategic reasons, good entry opportunities arise for other Depot A managers – increasingly at attractive conditions.
Result
For savings banks that want or need to adjust their real estate allocation in custody account A, the secondary market for shares in special real estate funds is a valuable alternative to termination. It enables an orderly, strategically motivated sale without interfering with the fund’s assets. At the same time, the buyer will have access to current funds with comprehensible key figures – at potentially attractive entry prices. In a market environment characterized by dynamics, regulatory change and increasing requirements, the secondary market can thus help to manage Depot A portfolios flexibly and in compliance with the rules – in the interest of all parties involved.
