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By no means must REITs and open real estate funds be competing investment vehicles; they can actually complement each other. However, in order for this to happen, German REITs must be constituted wisely.

The debate over the introduction of German REITs began in the fall of 2003. Back then, the Initiative Finanzplatz Deutschland (IFD) added this subject to its working agenda. Recommendations were submitted to the red-green political party governing the country at the time, which requested a report on the experiences that the international community has had with REITs. After the parliamentary elections in 2005, a fresh, new breeze blew into the debate: the introduction of REITs was conditionally approved in the new government’s coalition contract. The fact that Great Britain now plans to introduce REITs starting January 1, 2007 triggered another surge.

Source: FTSE EPRA/NAREIT Global REITs Index; Date: March 2006

Open real estate funds
In parallel to the debate on introducing REITs, open real
estate funds experienced bitter setbacks in Germany. After Deka Immobilien Investment, a company of the Sparkasse Finanzgruppe, went through its first liquidity crisis in 2004, DB Real Estate, a company of the Deutsche Bank Group, closed its grundbesitz-invest fund, as well as KanAm a fund in December 2005. Both of these closings triggered a midsized market tremor. In January 2006, the Bundesverband Investment und Asset Management (BVI) presented recommendations for overcoming the crisis. ”The open real estate fund is dead! Long live the open real estate fund!” was the title of a panel discussion in Frankfurt am Main on April 4, 2006. Interestingly, structures similar to the German open real estate fund are currently being created in several European countries – even in those that already have REITs. This is a good indication that the product is not so bad after all.

While German REITs do not yet exist and open real estate funds have to settle for a capital outflow in their bottom line, Anglo-Saxon opportunity funds are increasingly acquiring real estate portfolios in Germany. Some wonder how this is possible.

REITs and open funds complement each other
Here are a few theses: REITs and open real estate funds are not competitors. In fact, good REITs can help overcome the structural issues of the open fund, which is an outcome connected with term transformation: open funds invest their incoming funds in real estate on a long-term basis; however, individual investors can retract their money at any time, at short-term notice.

Every real estate investment product is a combination of financing and services for the investor. Open real estate funds – as other open funds, for example stocks or annuity funds – primarily offer a portfolio-oriented service to the investor. Since open real estate funds directly hold the real estate themselves, they also provide a real estate-related service to the investor; they actually manage or coordinate the management of the real estate. At the same time, directly holding real estate makes portfolio management difficult, since the transaction costs for purchasing and selling the real estate are high, and tax regulations (danger of commercializing the fund) impose limits on portfolio management.

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