France, Germany Real Estate Pressured as Property Funds Wobble

In the cheap-money era, a torrent of cash poured into European property funds. But as it gets easier to find decent returns elsewhere, investors are heading for the exits, adding fresh pressure to hard-hit real estate markets. With redemptions mounting, the incentive to sell properties and raise cash to pay out investors promises to bring an end to a standoff that began last year when interest rates spurred buyers to offer lowball prices that sellers weren’t willing to accept. Across Europe, commercial real estate investment plunged 59% in the first half of the year, according to MSCI, and valuations, already down by double digits, face the threat of a new hit as funds start to sell assets.

The dynamic poses a particular threat in France and Germany, where new fund types and rules introduced after the global financial crisis face their first major test. French OPCIs, a type of open-ended fund aimed at retail investors, have hoisted for-sale signs over more than €5 billion ($5.2 billion) of real estate at home and abroad. In Germany, the process is slowed by rules requiring investors to wait a year to get their money back, but the signs of strain can be seen in discounted trading in the funds.