The investment environment for real estate funds has changed radically within a relatively short period of time. The main trigger was the tight interest rate hikes that began in 2022. And even the latest interest rate cuts do little to change this. Open-ended real estate mutual funds are feeling the effects: The industry reported net outflows of funds for the first time in many years, around 900 million euros on balance in the first quarter of 2024 alone, according to BVI data. In individual cases, however, things can already get tight. And what if the trend continues? Will there then be fund closures or emergency sales?
This, in turn, raises the question of the state of institutional real estate special funds. Is there a threat of a similar scenario there? If so, this could quickly become a threat, because the liquidity cushions there are much smaller than with open-ended mutual funds. In addition, due to the lower granularity, even a few investors willing to exit are enough to put a fund in trouble. An investor who wants to exit prematurely says nothing about the quality of the fund portfolio. As with any share trade, there are interested investors on the other side who are waiting for an opportunity to get involved.
It is therefore not necessary for institutional investors to return their fund units to the asset manager or the capital management company (KVG). In principle, the fund units are fungible, i.e. transferable. A liquid trading venue that brings buyers and sellers together therefore benefits sellers, new investors and, last but not least, the asset manager. He does not have to manage outflows and inflows or, in the worst case, initiate sales to create the necessary liquidity.
Markets for such secondaries have long been established internationally, especially in the private equity sector. The investment strategy common in Anglo-Saxon markets offers a way to manage outflows of funds while preserving the integrity of a fund. In this country, too, it would be time for corresponding offers to prevail. The term "secondaries" or "secondary market" should be questioned, because who speaks of the secondary market when it comes to liquid asset classes such as equities and bonds? After all, this is also nothing more than trading in investment products that have already been issued – like a classic stock exchange.
Sales are predominantly strategic in nature
There can be many good reasons why an institutional investor wants to leave the circle of investors in a special fund. Especially in fundamentally changed real estate markets, investors are adjusting their strategic allocation targets. Some investors therefore want or need to restructure, both in the asset classes and within the real estate segment with its different types of use. In addition, many properties and fund portfolios require additional investments, for example due to stricter sustainability criteria, which were not initially planned. Some investors want to get involved – others don't.
Secondary markets enable strategic sellers to transfer their fund units to interested investors on suitable and regulated secondary markets, with market-driven and compliance-compliant price maintenance and with the necessary discretion. This not only prevents the need for forced sales within the fund, but also maintains the liquidity and stability of the fund. There is no risk of disadvantages for previous co-investors and thus no reputational risks.
For interested investors, entering special real estate funds via secondaries also offers advantages: they enter an already running product with a known track record and comprehensible performance. The properties have proven their profitability, the fund managers have shown what they can do. For buyers with opportunistic and value-add strategies, revitalization projects sometimes offer opportunities. A liquid and regulated secondary market ensures fair, independent and compliant market prices. It is a legally compliant trading venue where transactions can be processed transparently and efficiently thanks to regulated reporting standards.
And of course, asset managers and asset management companies also benefit, because if shareholders who are strategically willing to exit simply and quietly pass on their fund units to interested investors, outflows of funds are avoided and there is no risk of reputational damage. On the contrary, value-add investors can contribute equity to the fund for revitalizations and thus transfer the portfolio to the next phase of its life cycle.
In recent years, international secondaries markets have already established themselves, which now have a transaction volume of several billion euros per year. These trading venues provide the necessary regulatory framework and technological infrastructure to ensure a smooth process. Fund managers of special funds should therefore actively integrate the possibility of secondary transactions into their liquidity strategy for the benefit of existing clients and new investors.
