Real Estate Funds. Shares in closed real estate funds are sold like hotcakes. Spectacular bankruptcies and the conviction of individual initiators for capital investment fraud show, however, that you as an investor can burn your fingers violently with these products, which are usually offered as risk-free (“real estate is always safe”).
What is a closed real estate fund?
Real estate funds are offered in two different forms: as “open” and “closed” real estate funds. The difference is significant. In the case of closed funds, financiers/investors are advertised for a specific investment object. When the required amount has been collected, the fund will be closed, and the implementation of the project can begin. In the case of a closed real estate fund, this is, for example, the acquisition or construction of a property and the subsequent rental. The later sale of the property can also be planned. Investors take a considerable risk with such an investment because success depends on the development of a particular real estate project. Open real estate funds, on the other hand, function like equity funds. Many investors throw small amounts together. The fund management uses this money to buy various properties. Profits are made through rental income and property sales. Because open-ended real estate funds acquire many different properties, they can spread the risk better.
However, the risky closed-end funds are usually offered by financial advisors at your doorstep. With the signing of the contract, the investor becomes a co-owner of the financed property, which can be an office building, a business park, but also a senior citizens’ residence. If the property cannot be rented out as planned, the entire investment concept wobbles. The investor may lose all of the money invested.
What are the risks of the investment?
The economic success of closed-end funds depends on how successfully the investment property can be rented out should not rely on protection in any circumstances, of the “rental guarantees”, which are often touted as a sales argument. The investors are promised that nothing can happen to them or their fund, as another company guarantees individual rental income. Behind this are regularly financially weak companies that can only guarantee an individual rental income for a few years. If it is not suitable to attain the calculated rent on the market over the long term, the “guarantor” is quickly broke. It can also be the case that the “guarantor” builds loopholes into the guarantee granted by him and does not have to pay in the end.
Long-term rental agreements concluded with well-known companies, for example, from the food industry, offer a little more security in the planning phase. But, it is difficult to consider whether these contracts will be extended again after the lease expires. It becomes very risky if the fund relies entirely on the free rental market – and miscalculates in the process. An oversupply of offices and apartments leads to a drop in prices, a fact that has already resulted in severe losses for many closed-end real estate funds and thus for investors.
If the fund property is vacant for a longer period of time, in the worst-case scenario, the fund could go bankrupt, and the invested capital could be lost. If the participation is then financed with outside capital (i.e. you as the investor have borrowed the money invested), the capital investment can prove to be a threat to your existence, because your loan instalments continue to run there is also a currency risk for fund properties abroad, for example in the USA. Due to currency fluctuations, the return can go up as well as down.
Withdrawal from the contract is often only possible after 15 or 20 years. But even then, it is not the capital employed, but only the current value of the participation that is replaced. This is usually significantly lower than the capital employed because, especially in the initial phase of long-term funds, losses are predominantly produced. The investor cannot check the correctness of the amount himself without outside help. Calling in a specialist costs money again. Even if the sellers of such funds often claim otherwise: There is no significant sales market (“secondary market”) for the units. And finding a buyer yourself is usually hopeless. If the invested money is to be “available” quickly, a closed real estate fund is the completely wrong investment.
Are there any tax benefits?
Only those who pay a lot of taxes can save taxes. For the average earner, this sales argument is almost never true. If the investment advisor promises you a tax advantage without even knowing your specific tax situation, this is a clear warning signal. You also keep in mind that tax laws and personal tax bases are subject to change. Without the “green light” from your own tax advisor, you should therefore not take the tax advantages promised with closed real estate funds at face value.
Which costs arise?
When buying shares in closed real estate funds, an “agio” – often 5 percent and more – is usually added to the investment amount. The sales department collects that. The rest of the money is by no means fully invested. Hidden in the prospectus there are indications that trustees, tax advisors, initiators and credit brokers are drawing further large amounts, sometimes even continuously, from the fund investment. This cashing in jeopardizes the promise of returns. The more the initiators reach into the pot of investor money, the more difficult it becomes to close these gaps in the market through profits. Because fund operators are by no means economic magicians, even if they like to give themselves this image. The providers are obliged to prepare a sales prospectus. This contains the economic and legal details of the relevant fund. It must also show the costs. The most important data are also summarized in brief in the key investor information. They are to be made available to investors before making a purchase decision.