Residential real estate funds - safe investment or fraud-prone


In addition to condominiums or homes, open-ended real estate funds offer the opportunity to invest money in real estate. Private investors buy fund units and are thus owners of a real estate portfolio. With different funds existing, there are funds that invest their clients' money in residential real estate, especially and foremost in Germany, as well as others that buy commercial or residential real estate in Europe or worldwide.

We regularly receive inquiries from investors of various groups of companies that offer the development, conception and management of alternative investment funds (AIF) with an investment focus on residential real estate. Recently, there has been an increase in inquiries from investors who have invested with a provider based in Hesse.

What are AIFs?

A mutual AIF is an alternative investment fund designed for the general investor public and offered as an investment by corresponding issuers. As investors regularly report, very attractive returns are advertised, which allegedly cannot be achieved with other investment opportunities in times of low interest rates.

What are the tasks of a fund company?

One of the central tasks of a fund company is the planning, distribution and control of liquid assets, i.e. liquidity management. The legal framework for this is provided by the German Capital Investment Code (KAGB), and the banking supervisory authority BaFin monitors compliance with these requirements.

Corresponding goals between managers and investors are essential

The goals of an asset manager and investors do not always coincide. In particular, the investment conditions can reflect the costs of the manager's services. Professional managers offer fees that are largely based on performance. It is also important that fees for the purchase of a property are kept as low as possible. Purchase of real estate is the first but not the most important step to performance. In the life cycle of the property, asset management in particular sets the course. Variable fees, which are based on the increase in value or the optimized costs, assist to make real estate investments successful.

How should the relationship between the various parties be regulated?

Clear contractual agreements are very important so that the role and competencies of each acting party in the value chain are clearly regulated. Good fund and asset managers use an established set of contracts that regulates value limits and excludes conflicts of interest à priori. In particular, authorisations are a decisive factor in ensuring target congruence.

Asset management is essential for investment success

Asset Management determines the strategy for the property. Asset management works very closely with the property manager. It is essential for the success of real estate investment that clear rules are established between the units. In addition to the contracts between asset and property management, the selection of service providers is crucial.

Looking for and using purchasing advantages

Due to the real estate price boom in the last decade, solid purchasing work is essential in the next few years. The cost for facility management and construction services is expected to rise in the future. Similar to other industries, good asset managers pursue supplier consolidation in order to reduce prices and process costs in administration through synergies. A positive side effect is, of course, a significant improvement in service provision and risk minimization in service billing. In particular, when it comes to repairs and maintenance, services are difficult to understand.

What else should the asset management company do?

Asset Management should establish a quality management system. It is important that each process is measured with corresponding key figures. The simplest way is to benchmark providers, comparing both hourly rates and duration of execution. The acceptance process of the service provision is very decisive for a sustainable increase in the value of the real estate portfolio. A contract should not be awarded twice.

Rents will rise – but at what cost?

Reputable asset managers have a clear rent increase plan – especially in times of housing shortages. However, the promised sales should also be realized as cash. The track record or the receivables portfolio shows whether the rent increase was real or generated only on paper resulting in high value adjustments in later years.

Research required when buying real estate fund units

When choosing the goal of their investment, investors should carefully consider and analyse their options.

A high liquidity ratio testifies to the careful handling of investors’ money. If there is a lack of liquidity, for example, because investors' money is handled carelessly when repairing the properties, a fund quickly gets into difficulties and insolvency is a threat. During the financial crisis, lack of liquidity was the downfall of many funds. Funds had to be wound up because it was not possible to sell enough real estate within a short period of time to pay off exiting investors. In such a case, investors have to foot the bill and are then regularly left empty-handed.

Before investing capital in AIFs, it is recommended to first obtain information about the company from the respective supervisory authority or a lawyer to avoid falling for fraudsters. The supervisory authorities offer specific customer hotlines for this purpose. Furthermore, it is important to check the company track record. In Germany, the Federal Financial Supervisory Authority (BaFin) is responsible for all providers - whether located in Wiesbaden or Kiel.

It is also important to ensure that financing is not used for equity distributions. Furthermore, the investor must not forget that returns are always correlated to a risk of loss and, in the case of residential real estate, are always dependent on the seriousness of the respective asset management of the provider. Under no circumstances should investors allow for often psychologically trained sales staff to talk the investor out of their intention to sell their shares. If suspicion arises, it is recommended to immediately consult an expert for capital markets law.

The content of this article is valid as at the date of its first publication. It is intended to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on your specific matter before acting on any information provided. For further information or advice, please contact Benjamin Hasan, Partner at the Frankfurt office and board-certified specialist for banking law and capital markets law, via telephone at +49 69 247428444 or by email at benjamin.hasan@kyprianou.com