Open-ended real estate funds in criticism: Why investors shouldn't rely on this form of concrete gold
The term “open-ended real estate fund” suggests security to investors. On the one hand, because real estate is also known and valued as concrete gold. On the other hand, because funds enjoy a good reputation as a diversified form of investment. But it is precisely this security illusion that investment companies are said to have used as a selling point and, in some cases, did not adequately explain the risks to consumers. A lawsuit filed by the Baden-Württemberg Consumer Center is now putting the fund constructs to the test. Find out what is behind the criticism and what investors should pay attention to.
Open-ended real estate funds: What is that actually?
Open-ended real estate funds are basically investment funds that invest in a variety of real estate projects — such as office buildings, shopping centers or hotels. Investors can participate with comparatively small amounts and thus invest indirectly in real estate without having to buy a property themselves. Potential income is then made up of rental income and increases in the value of the real estate. The “open” in the name means: In contrast to closed-end funds, investors can regularly buy or sell shares — at least in theory. In practice, there may be restrictions due to specified retention and return periods.
Open-ended real estate funds also differ significantly from closed-end real estate funds in another way: Closed-end real estate funds usually involve investing in a specific project, such as a commercial property. For this purpose, the required money is collected from investors and usually invested permanently for years. Although open-ended real estate funds invest broadly, they are not as liquid as they sound.
In principle, investors must comply with three deadlines:
- Minimum holding period: Investors must own their fund shares for a certain period of time after purchase before they can return them to the fund. As a rule, this is 24 months.
- Return period: The investor must irrevocably announce that he wants to return the shares a certain period of time before the return. As a rule, this is 12 months.
- Withdrawal dates: The company may set specific dates per year for the redemption of fund shares. Many funds allow returns on a trading day; however, in the terms of the contract, the return can only be limited to one date per year.
Risk and assessment can be distorted
Apart from poor liquidity, open-ended real estate funds also have other risks. With regard to returns, for example. Since the funds primarily invest in leased commercial real estate, income depends on whether and to what extent increases in value and rental income are achieved.
A key problem for many funds is currently the significantly higher interest rate level. As a result, demand for real estate has fallen, at least temporarily, and prices are falling — particularly in the commercial sector.
Due to the market situation, many investors want to sell their shares and get paid out. However, if many shareholders want their money back at the same time, real estate may have to be sold under pressure and possibly at a loss.
Despite the difficult market situation, however, some funds have even upgraded their properties in recent years. However, at the latest when selling, these valuations must often be corrected - which can also lead to significant devaluations and losses.
In view of inflation and economic policy uncertainties, many investors sold shares as early as 2024. According to the Management consultancy Barkow, which regularly documents net cash inflows into open-ended real estate mutual funds, almost six billion euros flowed out of open-ended real estate funds last year alone. Trend: rising.
Open-ended real estate funds are under criticism following court ruling
In addition to the tense situation on the financial markets, negative reporting on open-ended real estate funds is also likely to intensify the sales wave. For example, the Nuremberg-Fürth Regional Court considers the open-ended real estate fund “UniImmo: Wohnen ZBI” in crisis to be riskier than stated by the investment company. The court has in a much-noticed verdict requires Union Investment Fund Management to stop using the two SRI classes “2" and “3" to describe the risk of their open-ended real estate fund. In particular, the focus is on formulations that suggest that open-ended real estate funds are available at all times and involve only low risks. From the plaintiffs' point of view, this is misleading - especially because there have been repeated withdrawal stops and valuation losses in the past. Union Investment wants to appeal against this.
Open-ended real estate funds are rightly criticized. Especially since, from an investor's point of view, transparency, flexibility and a well-founded risk analysis are more important than ever, especially in turbulent economic policy phases.
By contrast, real estate as a “solid” asset class and portfolio addition is and remains attractive. However, investors should be well informed and rely on innovative investment solutions in order to benefit from real estate even in uncertain times. For example with digital, flexibly tradable shares on attractive real estate projects in selected cities and holiday regions.
