Making real estate funds future-proof

Real estate funds are currently under pressure from two sides: higher financing costs and increased investor return expectations. “The rise in interest rates means that funds must now refinance at higher costs,“ Knoblach points out. “Conversely, investors are now expecting at least double-digit returns instead of mid-single ones.” Additionally, parts of the real estate portfolios are being revalued. If there is even the slightest doubt about a fund’s performance, investors are likely to turn away.

Open-ended real estate funds are particularly susceptible to market fluctuations. “Regulatory improvements have been implemented by the supervisory authorities, extending redemption periods for investors,” says Knoblach. Nevertheless, restructuring and the exploitation of rights such as mortgages can begin right away if a large number of investors request redemptions. “Fund managers are well aware of their numbers and have already started restructuring portfolios to create the necessary liquidity and ensure value preservation,” Knoblach adds.

Luxembourg compartments present a strong option for such restructuring. “Illiquid assets, guarantees or company shares can be incorporated into these insolvency-protected compartments that are set up in accordance with Luxembourg securitisation law,” says Knoblach. The resulting securities can be deposited and cleared and are continuously and independently valued. Additionally, a listing on a stock exchange listing is possible, offering regulatory advantages particularly for institutional investors.

This approach also safeguards the rights of investors. “The compartments can be structured in accordance with the applicable regulations and the investment terms of the funds,” Knoblach concludes. “Both German and Luxembourg funds are already utilising this option.”