Tighter Regulations for Institutional Investors’ Open Property Funds Seem Reasonable

Continuing liquidity problems appear to have caused German open property funds to freeze about one third of their invested assets, i.e., about 26 billion Euro. The German Federal Ministry of Finance is currently discussing a bill which is to help German open property funds limit excessively high short-term outflows of liquidity. The Centre for European Economic Research (ZEW) Mannheim has conducted a survey among financial market experts regarding these tighter regulations.

In order to solve a fund’s liquidity problems, financial market experts approve the proposed implementation of a minimum holding period and a cancellation period for investors, as well as a fixed valuation adjustment in case of returning the fund shares before maturity, especially regarding institutional investors. However, the experts are equally convinced that open property funds who have suspended the redemption of shares are prone to devaluation.

Suspending the redemption of shares not only affects private investors but increasing numbers of institutional investors as well. This is why the Federal Ministry of Finance is planning to impose stronger regulations for open property funds. The main objective of these regulations is to make minimum holding periods and cancellation periods for investors statutory. A fixed valuation haircut on real estate values as determined by appraisers is another objective. However, judging from the current state of discussion, the implementation of such measure is rather improbable.

The ZEW survey reached mixed results. Almost 38 percent of the participating experts assume that the implementation of a minimum holding period and cancellation periods is sufficient to solve a fund’s problems. A little over 37 percent do not think tighter regulations for open property funds are necessary to prevent a fund’s liquidity problems. One fourth of the participants are in favour of measures exceeding minimum holding periods and cancellation periods.

A separate assessment of regulatory measures for institutional and private investors paints a different picture. Financial market experts are especially in favour of stronger regulations for institutional investors. About 27 percent of the participants would like to apply minimum holding periods, cancellation periods, and a fixed valuation haircut in case of returning the fund shares before maturity on institutional investors. Only seven percent deem this sensible for private investors. 60 percent of the participants think that realising at least two of these measures for institutional investors would be useful while only 29 percent would implement these measures for private investors.

The participating financial market experts agree that open property funds who have suspended the redemption of shares will face devaluation. Almost 90 percent of those who participated in the survey foresee devaluation, most of them, however, expect a devaluation of less than ten percent. Almost 28 percent do expect a devaluation of more than ten percent. It has to be mentioned that around 30 percent of all experts surveyed did not give their opinion on this question. This underlines the insecurity regarding the current state of the affected open property funds.

For further information please contact

Prof. Dr. Felix Schindler, E-mail: schindler@zew.de  

Dr. Peter Weserheide, E-mail: westerheide@zew.de