Volatility of German funds may have big Czech impact

A recent shakeup in some German open-ended funds is affecting large-scale real estate deals in the Czech Republic.

Michael Stein 10.12.2010

Some of The Park will come onto the market over the next two years. foto: © ČESKÁ POZICEČeská pozice

Some of The Park will come onto the market over the next two years.

The role of German open-ended funds (GOEFs) on the real estate investment market in the Czech Republic and its Central European (CE) neighbors has been substantial, representing around a quarter of regional market investment over the past three years. That is why the fate of recently liquidated funds as well as new German investment legislation has made it more difficult to answer the question of when international investors will return to CE markets.

Three funds announced their liquidation the past two months: Aberdeen Asset Management’s €1.3 billion Degi Europa fund, Morgan Stanley’s €852 million P2 Value fund and Kanam’s $550 million US-grundinvest fund. Besides causing a shake-up in the German fund industry, in which seven other funds remain frozen, the consequences of the liquidations will include a substantial number of properties coming back onto the market.

According to Thomas Beyerle, head of the group market analysis at the German Society of Property Researchers, there will not be strong turbulence on the market as a result of the liquidations. ‘There will be no massive selling story in the next two quarters.’

“The funds have two years to liquidate their assets. There will be no massive selling story in the next two quarters,” Beyerle said. In fact the disposal process is ongoing, having started toward the end of 2009 as a means for funds to restore liquidity.

In the case of Degi Europa’s early November sale of a Cologne, Germany, shopping mall for €157 million to a joint venture of the Canada Pension Plan Investment Board and LaSalle Investment Management, the process began in February 2010. Previous Degi Europa fund disposals in 2010 include the sale of the CB16 tower at La Défense in Paris and the King William Street office complex in London.

Degi’s overall investment in Prague reached around €400 million toward the end of 2008 with the purchase of 11 of the 12 buildings comprising The Park office complex in Prague 4. Four of the buildings were in the Europa fund’s portfolio while the rest are spread over other of Degi’s open funds.

Shortly after announcing the liquidation of the Europa fund Aberdeen announced that liquidity shortages will prevent the frozen Degi International and Degi Global Business open-ended property funds from opening for redemptions until November 2011. A wave of disposals was announced to restore liquidity to these funds.

CEE region is ripe

According to Beyerle there will eventually be a lot of deals in the region, though in some parts much more than others.

“There is still a core sentiment, so they will look at the Czech Republic and Poland. There will be more deals than ever in CEE, but probably not in SEE,” he said, including Hungary in the latter group due to its currency struggles. “There will be a lot of potential buyers though there won’t be a big depreciation except for properties bought at the end of 2007 in the Czech Republic and Romania in not very good locations. I have my doubts about these,” Beyerle added.

Degi’s Romanian properties have suffered a particularly difficult fate. The first German real estate fund to enter the market in 2007, it bought an office portfolio at the peak of the market that is considered to be relatively low quality and current vacancy rates in the buildings seem to bear this assessment out. Although the retail property is considered a superior product, a cinema and leisure extension did not perform as expected.  

While the portfolio’s single institutional grade asset, Millennium BC tower, had 100 percent initial occupancy and premium covenants meant to support the aggressive initial pricing, it had the bad fortune of being severely damaged by a fire and remains vacant with significant insurance issues.

However , a market insider said the asset had technical issues even before the acquisition, with severe underground water table infiltrations in the multilevel basement parking. Another office, Construdava BC, located in the Pipera area, is a victim of more typical factors such as area oversupply and insolvent tenants.