DTZ Insight German Open Ended Funds October 2012 Liquidation creates 20bn of opportunities. Total assets holdings by GOE Funds in Europe 3,0

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1 Ratio on invested stock as % of an average DTZ Insight German Open Ended Funds October 212 Liquidation creates 2bn of opportunities 17 October 212 Contents Legislative framework in change 2 Liquidation strategies 4 Impact on the investment market 5 Global overview 7 an portfolio 8 Authors Ivan Biojo CEMEA Research Analyst ivan.biojo@dtz.com Ursula-Beate Neisser Head of Research - ursula-beate.neisser@dtz.com Magali Marton Head of CEMEA Research magali.marton@dtz.com Contact Hans Vrensen Global Head of Research hans.vrensen@dtz.com In 28, German Open Ended (GOE) Funds were caught in the turmoil of the global financial crisis. A number of funds had to stop redeeming share certificates in order to ensure that they had enough liquidity on hand at any time. The German regulator new regulations forced some funds to decide their liquidation after the freeze of redemptions period. 13 GOE Funds have already announced their liquidation and five other funds are still in freeze of redemption with end dates between November 212 and June 213 for the last one; for some of these funds a prolongation of the freeze is possible. We estimate that 2bn of commercial real estate assets will come to the markets with the largest part located in. The liquidation process now engaged by the GOE Funds is expected to provide a vast amount of qualitative opportunities. However the main question is now to define if the local market can absorb these future sales without any negative impact on the prices. Based on our estimations, forced sales by GOE Funds will represent 8% of the annual volume of investment in with core markets such as, and showing a 5% ratio whilst Southern and are far above at 12% and 29% respectively. In this context, we expect to see a decline in capital value in these 2 regions that will face an over-supply of investment opportunities. Figure 1 Total assets holdings by GOE Funds in 3, 2,5 2, 1,5 1,,5, Southern Ratio on investment volume as % of the an average DTZ Research

2 German Open Ended Funds October 212 Legislative framework in change A new era as the regulations now apply to existing funds In 28, GOE Funds were caught in the turmoil of the global financial crisis. A number of funds had to stop redeeming share certificates in order to ensure that they had enough liquidity on hand at any time. The German Investor Protection and Functionality Improvement Act (AnsFuG) was adopted by the legislator in Spring 211 and entered into force on 8 April 211. Its aim is to strengthen the character of open-ended property funds as a medium-term investment by giving fund managers a greater scope to control liquidity and better protection for private investors. On 1 January 213 the new regulations of the German Investor Protection and Functionality Improvement Act will also take effect for funds that existed before 7 April 211. The contractual arrangements of these funds must be adapted to the new legal requirements by that date. The new Act will limit borrowing to 3% (instead of 5%) of the market value of the properties belonging to the fund and the transition period extends to the end of 214. For investors, a holding period of 24 months has to be respected for all new investments. Concerning share returns exceeding 3, per calendar half year an irrevocable written notice of 12 months has to be made. Investors will also have to comply with the return of shares in the volume of 3, per calendar half year without the need to comply with time limits. On the basis of the adopted an regulatory measures a coherent set of investment rules will apply to all funds and their managers. The framework for these new rules will be within the new German Capital Investment Code (Kapitalanlagegesetzbuch) that will repeal the German Investment Act which ruled open ended property funds until today. The German Capital Investment Code (Kapitalanlagegesellschaft KAG) will implement the Directive on Alternative Investment Fund Managers (AIFM). It also integrates the regulations of the undertakings for Collective Investment in Transferable Securities Directive (UCITS) while repealing the German Investment Act. Finally, it incorporates the regulations on the application of the an Regulation on venture capital funds as on an Social Entrepreneurship Funds. In its first draft, the new code banishes the creation of new open-ended property funds, whether they are public or special funds. At the same time it provides the protection of the existing funds inventory. The property sector expressed surprise and criticism and sought dialogue with the legislator claiming that the sustainability of open-ended property funds was guaranteed by the AnsFuG. Another statement presented was that open-ended property funds enabled retail investors to invest in property and was an important component of private wealth creation. They also argued that special funds were an accepted form of investment for institutional investors and insurance companies, which had not caused any significant problems for the general public. For fund managers, a daily redemption of share certificates is not a mandatory requirement but at least one redemption day per annum is. The valuation cycle depends on the number of days since the redemption of share certificates; it is limited to a quarterly valuation. Is it the end of open-ended property funds? The real estate industry s hope that the AnsFuG would create a reliable framework for open-ended property funds proved to be false. After just 15 months, in July 212, the government presented a draft law implementing Directive 211/61/EU of the an Parliament and of the Council on 8 June 211 on Alternative Investment Fund Managers (AIFM Implementation Act AIFM-UmsG), that could be understood as the end of open-ended property funds. DTZ Insight 2

3 German Open Ended Funds October 212 Status quo of open-ended property funds When the AnsFuG was adopted, market participants assumed that the open-ended property funds product would be restructured on the basis of the new regulation, with a clear separation between public funds, primarily used by retail investors, and special funds, whose flexibility is attractive for institutional investors. This restructuring process was more painful than expected. The majority of funds, which suspended the redemption of its shares when the Act was adopted and were working towards reopening have now cancelled their management mandate, because the majority of investors were unable to condone the new regulations. Table 1 Funds in liquidation Name Year / month of freeze Notice of management with effect from KanAM US-Grundinvest* 28, HansaImmobilia 212, DEGI Europa 28, MorganStanley P2Value 28, TMW Immobilien Weltfonds 21, DEGI Global Business 29, Axa Immoselect 29, DEGI International 29, Axa Immosolutions 21, UBS (D) 3 Sector RE 21, KanAm Grundinvest 21, SEB ImmoInvest 21, CS Euroreal 21, On, based on funds information available *all properties sold, as of the management went over to M.M. Warburg Table 2 Funds - freeze of redemptions Name Year / month of freeze Latest prolongation End of closing Prolong. possible? Value of real estate ( mn)* NAV ( mn)* DEGI German Business 28, No KanAm Spezial Grundinvest Fonds 28, Yes CS Property Dynamic 28, Yes SEB Global Property Fund 21, Yes SEB ImmoPortfolio Target Return Fund 29, Yes 1,395 81, based on funds information available *end of July 212; SEB Global Property Fund End of 211, SEB ImmoPortfolio Target Return Fund DTZ Insight 3

4 German Open Ended Funds October 212 Liquidation strategies Maximizing profit minimize timing Every fund management structure does every effort to sell its asset portfolio at the best price possible, given the current economic environment, before their mandate expires. To achieve this goal, the funds have a time period that ranges from 7 months (HansaImmobilia) to 56 months (CS Euroreal, SEB ImmoInvest), based on a start in September 212. All properties that will not be sold within the fixed time corridor will go over to the Depotbank which will then complete the liquidation process. All fund managers follow a specific and structured sales strategy to secure that investors receive as much profit as possible. All sales plans refer to the current and future attractiveness of single buildings, the current and future market situation, the finance situation for each property and the tax duties linked to sale. It is intended to grip at its optimum the market and property cycle for the purchase. BOX 1: FOCUS ON HANSAIMMOBILIA (MANAGED BY HANSAINVEST) STRATEGY On 4 October 212, HansaImmobilia gave notice of the management mandate with effect on 5 April 213. With the official announcement of the closure of the fund, investors can no longer return their shares to the fund company. This is the first fund to choose this short term strategy as it has given itself only 6 months for the liquidation. HansaInvest plans to sell those properties that are not sold on the market at the management period end, to one of the special funds of HansaInvest. Investors of HansaImmobilia fund, who have not sold their share as of 13 August 212, will receive an extra dividend if properties that had been transferred to a special fund of HansaInvest are sold to a higher price within a 5 year period (from April 213 to April 218). This situation will set a precedent for shareholders that invested in other GOE Funds in liquidation. High importance is given to the portfolio asset management in order to reduce the vacancy ratio, to renew rental contracts as early as possible and to secure new tenants. The fit out of the properties is monitored and improved. Parallel to their sales efforts, the funds will pay regular dividends to their shareholders. In some cases it might be necessary to balance between the maximum sales price and the need to arrange liquidity on time. Figure 2 shows the total net assets holdings by GOE Funds in liquidation in million and the liquidation ratio achieved at summer 212. Figure 2 Total net assets holdings ( m) and liquidation ratio achieved Total assets (net) 212 Liquidation ratio For the biggest funds, those whose portfolio accounts for more than 1bn, the process of liquidation has just started with a ratio of liquidation ranging from 8% to 25%. GOE Funds currently frozen are also engaged on a selling process in order to receive liquidity that would satisfy both the investors and the asset management structure., based on funds information available BOX 2: FOCUS ON KANAM GRUNDINVEST STRATEGY Assets are divided into 4 categories Category 1 ready to sell: no leverage used, best price achievable based on market and individual property cycles Category 2 ready to sell when finance is matured in order to avoid paying of prepayment penalty Category 3 ready to sell after having improved the asset attractiveness (leasing contracts to be renegotiated and/or buildings renovation or refurbishments) Category 4 finance needs to mature and building attractiveness has to be improved DTZ Insight 4

5 German Open Ended Funds October 212 Impact on the investment market Total holdings of GOE Funds in accounted in 211 for 72bn, a level unchanged since 27. The majority of these capitals are located in ( 21bn), ( 15bn), ( 8bn), and in Southern (Italy & Spain) with a further 8bn of assets. These 7 countries combined together accounted for 75% of the GOE Funds equity holdings across. In this respect, the liquidation process now engaged by thirteen GOE Funds should provide the investment market with a vast amount of opportunities. Since their coming back to the market in 21, GOE Funds sold 5.7bn of assets across (Figure 3). They were mainly active on the office sector ( 3.9bn) with a specific focus on the German, French and markets, thus responding to the rich appetite of cross-border equity players. On the retail sector, the liquidation process of some GOE Funds has created interesting opportunities on shopping centres. Going forward, the GOE Funds portfolio to be sold accounted for 2bn globally with the biggest volume coming from CS Euroreal ( 5.3bn), SEB ImmoInvest ( 4.8bn) and KanAm Grundinvest Funds ( 3.5bn). CS has been quite active on the sales side in whereas SEB ImmoInvest had taken advantage of private capital flows targeting the French market. However the main question now is to define if the local market can absorb these future sales without any negative impact on the prices. To answer this question we estimated at 18.4bn the value of forced sales expected in from now to April 217. Based on our portfolio analysis, we extrapolated the volume of forced sales by country and compared these figures with the annual average of investment volume registered since 21. GOE Funds forced sales will represent 8% of the annual volume of investment in with core markets such as, and showing a 5% ratio whilst Southern,, and are far above from 12% to 29%. Therefore, targeted pricing will be more difficult to achieve in these 2 regions. Figure 3 Total assets holdings by GOE Funds in, bn Italy & Spain Others Money into Property 212 Figure 4 Sales by GOE Funds in, m H1 212 Office Retail Mixed Use Industrial Other/Unknown Figure 5 GOE Funds forced sales value as proportion of investment volume average by country (21-Q2 212) 35% 3% 25% 2% 15% 1% 5% % Core Markets Southern DTZ Insight 5

6 Ratio on invested stock as % of an average German Open Ended Funds October 212 What impact will these liquidations have on the investment market is the main question that arises. For one, these forced sales create numerous opportunities on markets currently constrained by the lack of products. On the other side, a significant risk exists that these liquidations will affect pricing in some markets unable to absorb a sudden increase in products. Figure 6 represents the forced sales by GOE Funds as a proportion of the investment volume recorded from 21 to 212. The net asset value of GOE Funds is unevenly represented among an regions. The ratio ranges from 4% in to 29% in. Among the three core markets, has the highest exposure at 13%. However, investment volume recorded since 21 was subdued in the majority of an countries as a direct consequence of the macroeconomic conjuncture. The analysis of GOE Funds forced sales as a proportion of invested stock in provide a more structural and long term approach and draws a less gloomy picture of the market trends in. In this context, Southern is better ranked due to the large size of its invested stock whilst and regions are once again on the highest ratio at 1% and 1.6% compared to the an ratio standing at.7%. Combined together, the comparisons of forced sales by GOE Funds as proportion of investment volume and invested stocks shows the countries where pricing could be impacted significantly. This is the case in, and to a lesser extent. Anticipation of the market participants regarding these forced sales by GOE Funds is always difficult to anticipate. In this uncertain period, purchasers operate with a high level of selectivity, with a clear focus on the most qualitative and liquid assets in the core markets. They will operate similarly on the opportunities putted on the market by GOE Funds. A detailed analysis of the portfolios to be liquidated is presented in the following pages. Figure 6 Sales as proportion of investment volumes in % 5% 1% 15% 2% 25% 3% 35% Core Markets Southern Figure 7 Sales as proportion of invested stock in,%,5% 1,% 1,5% 2,% Southern Core Markets Money into Property 212 Figure 8 Total assets holdings by GOE Funds in 3, 2,5 2, 1,5 1,,5, Southern Ratio on investment volume as % of the an average DTZ Insight 6

7 German Open Ended Funds October 212 Global overview A -centric portfolio As of September 212, 612 properties around the world are held by GOE Funds in trouble (currently in liquidation, having announced their liquidation or in freeze of redemption). A large part of these portfolios, 9%, is located in followed by North America (7%), Asia (3%) and 2 assets in South and Central America. These portfolios account for over 9m sq m of leasable space of which 8.2m sq m is located in. Asia is the second most important market with 21 properties identified, for a total of 99, sq m. North America concentrates more assets in liquidation (42) than Asia (21) but they represent only 143,1 sq m. The majority of the portfolios are already in liquidation. Properties belonging to funds that are already in liquidation represent 82% of total assets held by GOE Funds in trouble. Moreover, 113 assets representing an additional volume of 1.4 million sq m could be released if the 5 funds currently in freeze of redemption announced their liquidation (see table 1 on page 3). These additional portfolios to be sold have been estimated at a value of 1.4bn and they are mainly located in. The office sector is the favoured property type across the portfolio of GOE Funds in liquidation; it accounts for 6m sq m of leasable space on a global basis. concentrates the largest part of office assets held by GOE Funds with 5.2 million sq m identified. Office assets located in the United States represent a further volume of 8, sq m. The retail sector ranks second position in GOE Fund allocation with 1.6 million sq m of space. Once again, the majority of these assets are located in (1.3 million sq m). The remaining 2, sq m is located in the United States. The hotel and logistics asset class is represented only in Figure 9 Status of GOE Funds by geography, number of assets Figure 1 Global North America in liquidation Freeze of redemption Status of GOE Funds by geography, sq m Figure 11 Global North America in liquidation Freeze of redemption Asia South - Central America Asia South - Central America Status of GOE Funds by region and asset type, sq m North America Asia South - Central America Office Retail Logistic Hotel Other DTZ Insight 7

8 German Open Ended Funds October 212 an portfolio 7.6mn sq m to be sold by GOE Funds across the region, mainly in the office sector The an portfolio of funds in liquidation or for whom redemptions have been frozen represents 453 assets and a total volume of 7.6mn sq m of leasable space. Two thirds of these assets are office buildings (321 assets). This number includes 31 properties already in liquidation and therefore to be sold in the short / medium term. A further 2 commercial assets accounting for 364, sq m could be put into the market if the funds in freeze of redemption announced their liquidation. It means that 4.9mn of office space will be sold on the an market. The other type of assets are less present in the portfolios of GOE Funds in trouble but once liquidated they could provide some relief in markets constrained by the lack of attractive opportunities. Retail assets account for 17% of their portfolio with 62 assets representing 1.3mn of GLA sq m. The number of logistics assets is lower (24) but they total 8, sq m of warehouse spaces. Some GOE Funds currently in liquidation or freeze of redemption invested some capital in the hospitality sector. We identified 25 hotels which will be sold in a 3 year horizon. The map on the next page shows the geographical distribution of the GOE Funds portfolio by number of assets to be sold and by type of assets: office, retail, logistic, hotel and other. Figure 12 an GOE Funds by asset type, number of assets Figure 13 Office Retail Logistic Hotel Other In liquidation an GOE Funds by asset type, sq m Figure 14 Freeze of redemption Office Retail Logistic Hotel Other In liquidation Freeze of redemption Status of GOE Funds by region and asset type, sq m 1% 8% 6% 4% 2% % Global North America Asia Office Shops/Retail Logistic Hotel Other DTZ Insight 8

9 German Open Ended Funds October 212 Map 1 Assets held by GOE Funds in liquidation (as at end of September 212) DTZ Insight 9

10 German Open Ended Funds October 212 an portfolio - Office Mature markets looking for buyers We have identified 321 assets totalling 4.5 million sq m of office space across, held by GOE Funds currently in liquidation. Unsurprisingly, concentrates the largest part of these portfolios as GOE Funds invested massively on their domestic market. (Netherlands, Belgium and Luxembourg) is the second region in terms of investment in the office sector and accounts for 28% of the portfolios to be sold. It represents a total of 9 properties and 1.3 million of sq m. In this sub-region, Netherlands has a predominant position with more than 87, sq m of office space. The French market was a preferred target for the GOE Funds and, at the peak of the market in 28, their holdings amounted for 18bn. Funds currently in trouble still hold 48 office assets accounting for more than 78, sq m. The quality of these assets mainly Grade A buildings completed during the 2, should attract Core or Core + funds willing to deploy their capital in one of the biggest market across. The market could also be boosted by the sales of the office portfolio held by GOE Funds in trouble. Among the 4bn of their holdings, we have identified 27 office buildings representing 42, sq m. German investors concentrated their purchases on prime assets in core markets. Our analysis of the geographical distribution of the office portfolio across show surprising results. In emerging investment markets such as, Italy or Spain, their investment was almost exclusively concentrated in core markets i.e. the capital city. Figure 15 an GOE Funds office portfolio, number of assets Figure 16 5% 9% 15% Others 13% 28% 3% an GOE Funds office portfolio, sq m Figure 17 5% 9% 16% 32 assets Others 12% 4.5 million sq m 29% 29% an GOE Funds office portfolio by markets, sq m % 2% 4% 6% 8% 1% In more mature markets like in or in, GOE Funds strategy was more diversified in terms of location and included purchases in some secondary markets. As an illustration, only a third of the French portfolio held by the GOE Funds in trouble is located in the core markets. The forced sales of their portfolio will be massive on the secondary markets whilst risk aversion keeps investors away from these markets. The situation is almost the same in, and with holdings in core markets accounting for 57% on average. Others Core markets Secondary markets Core markets are the capitals of each country or Top 5 for and Top 3 for DTZ Insight 1

11 German Open Ended Funds October 212 an portfolio - Retail Plenty of choices in and opportunities to emerge in Italy GOE Funds in liquidation hold 1mn sq m through 55 assets of which 49% are located in, followed by Italy with a market share of 25%. In terms of overall portfolio surface, the an distribution of the GOE Funds portfolio in liquidation is similar. The 1mn sq m of retail space they owned is mainly concentrated in (44%) and in Italy (32%). Their exposition on the and markets was limited with 7% and 4% of the leasing retail space located in these two sub-regions. In contrast with the office sector, and accounted for a lower market share with 4% and 1% of assets located in these countries. Interestingly, the Italian market could be awakened by the assets entering on the market by GOE Funds in liquidation. The volume of 326, sq m retail space expected to flow into the Italian market should operate as a booster. Most of the properties to be sold are large size shopping centres, still attractive for REIT and institutions. Retail assets located in should offer some interesting opportunities with a mix of retail format (high street shops, retail park and shopping centres) and size of assets. Investors are still attracted by the retail sector who accounted for a third of the investment in 212. Retail assets held by the GOE Funds in liquidation, are smaller in Austria which accounts for 4 buildings below 1, sq m and 2 above this level. Figure 18 an GOE Funds retail portfolio, number of assets Figure 19 4% 7% Spain 7% Italy 25% 4% 4% an GOE Funds retail portfolio, sq m Figure 2 6% 1% Spain 8% Italy 19% 5% 1% 49% 51% an GOE Funds retail portfolio by size, number of assets Italy Austria Spain Sweden Others 55 assets 888, sq m Below 1, sq m 1, - 2, sq m Above 2, sq m DTZ Insight 11

12 German Open Ended Funds October 212 an portfolio - Logistics Interesting opportunities in traditional markets Figure 21 an GOE Funds logistics portfolio, sq m GOE Funds have also invested some of their capital into the logistics sector across. The liquidation of some of them could put into the market more than 539,7 sq m. Their geographical distribution highlights a dominant share for (34%) but also in Spain (26%) and in (2%). On average, the largest properties in liquidation are located in Poland where the only 2 assets to be sold account for 13% of the logistics portfolio surface. Finland has the lowest average size in logistics properties: 3 assets for an overall 19,5 sq m of leasable area. Poland 13% 2% Finland 4% Netherlands 3% 54, sq m Spain 26% 34% an portfolio - Hotel Paradoxical invested stock Figure 22 an GOE Funds hotel portfolio, sq m and number of assets In this alternative asset class, investment strategies are very variable as the risk reward tradeoff is more difficult to grasp. As a result, there is not a relationship between the number of assets owned and what they represent surface wise. The overall 278,4 sq m of leasable hotel surface is divided into three countries. is the country with the largest number of assets (9) which represent 12, sq m or 44% of the portfolio surface. The Italian landscape is very different. Only 2 assets, as is the case for Belgium, account for 129,9 sq m or 47% of the portfolio surface. The hotels are located in Tortona, in the suburbs of Milan and in the periphery of Milan. This last asset is managed by the Spanish based hotel chain NH Hoteles. Interestingly, the Tortona Hotel (13,56 sq m) is the largest asset in liquidation among all categories Italy Belgium Austria sq m in liquidation Number of assets in liquidation DTZ Insight 12

13 German Open Ended Funds October 212 DTZ Research Contacts Global Head of Research Hans Vrensen Phone: +44 () Head of Forecasting Matthew Hall Phone: +44 () Head of CEMEA Research Magali Marton Phone: magali.marton@dtz.com Head of APAC Research Chor-Hoon Chua Phone: chorhoon.chua@dtz.com Head of Americas Research John Wickes Phone: john.wickes@na.ugllimited.com Head of Greater China Research David Ji Phone: david.yx.ji@dtz.com Head of Strategy Research Nigel Almond Phone: +44 () nigel.almond@dtz.com Head of Research Ben Burston Phone: +44 () ben.burston@dtz.com Head of Greater China Research David Ji Phone: david.yx.ji@dtz.com DISCLAIMER This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ. DTZ October DTZ Insight 13