Interest rates have been in the doldrums for years. For current and deposit accounts, there is usually a zero in front of the decimal point, and at some banks there is even a minus sign. A number of financial institutions have started charging their major institutional clients for holding large amounts in their accounts. Interest rates at zero and below also affect the real estate industry. Open-ended retail real estate funds and institutional funds regularly leave large amounts in short-term accounts – for example, when a purchase is about to take place but its conclusion is delayed. The proceeds from a sale are also placed initially in an account. Rental income can come to several hundred million euros, and cash also has to be kept available for ongoing management of property holdings and other short-term payments. Last but not least, open-ended real estate funds are required by law to maintain minimum liquidity of 5 percent of fund assets. For Union Investment’s UniImmo: Deutschland open-ended retail real estate fund alone, that comes to about €500 million.
Germany’s open-ended real estate funds actually have an average liquidity ratio of 21.6 percent at present, according to the Scope Ratings agency. UniImmo: Deutschland has a liquidity ratio of 30 percent, while UniImmo: Europa, another of Union Investment’s open-ended retail real estate funds, has a liquidity ratio of 28.6 percent. This is not a serious problem, says Thomas Röhrs, Fund Manager at UniImmo: Deutschland. “The money is not sitting in bank accounts attracting zero interest because our open-ended real estate funds for private investors place their liquid assets mainly in special securities funds.” He notes that at UniImmo: Deutschland, for example, about 95 percent of liquid assets are managed by a Union Investment Institutional fund and are earning positive returns. As of 30 September 2014, UniImmo: Deutschland had only around 1.5 percent of fund assets actually sitting in bank accounts. “This means the impact of negative interest rates on cash amounts like this is really negligible”, Röhrs confirms. Over a full year, he adds, negative interest will account for less than 0.005 percentage points of the fund’s performance.
This is especially true, considering that liquidity ratios at open-ended real estate funds are generally falling. Firstly, they would rather invest money that comes in than place it in an account; and secondly, legal rules introduced in 2013 governing minimum holding periods and terms of notice enable fund managers to improve their forecasting and their control over the outflow of funds. This reduces the need for liquidity. In the long term, Scope Ratings expects that liquidity ratios could fall below 15 percent. Other real estate companies are also affected by low interest rates. Here, too, the impact is being contained. “What is more crucial for liquidity management is the difference between investment interest and lending rates, rather than the absolute – even if negative – level of interest rates”, says Werner Russ, Divisional Manager for Finance and Property at the LEG Management housing company. He believes that the positive aspects of low lending rates cancel out the impact of low interest on deposits, especially as the available funds are more likely to be put into investments.
Institutional funds, too, are unperturbed by interest rates. This is confirmed by Markus Wiedenmann, Managing Partner at Art-Invest Real Estate: “We have yet to receive an invoice for leaving money in a bank.” Institutional funds generally do not hold much liquidity, because they collect money from their institutional customers only when it is needed for the purchase of a property. When a property is sold, the institutional fund usually transfers the money quickly to investors. “It is not worth looking for an interest-optimised investment for just a few days”, Wiedenmann explains. For this reason, he adds, the interest-rate situation is something that they simply accept, especially as the low level of cash holdings means that the impact on fund performance is barely measurable anyway.