New risk assessment for residential property funds

I. Why should I read this?

Open-ended real estate funds are considered a comparatively safe form of investment, primarily targeting private investors and risk-averse investors. The low risk is usually represented by a classification in low risk classes. However, in view of rising interest rates, increasing inflation and geopolitical uncertainties, these products have also come under considerable pressure. In addition to considerable losses in value for individual funds such as Uni Immo Wohnen ZBI, which suffered a loss of value of around 17% in a special valuation in June 2024, case law is now also imposing new requirements on risk classification with direct implications for the practices of fund providers, distribution partners and investors.

II. What do I need to know?

The reason for this was a lawsuit brought by a consumer association against the fund company. The Local Court of Nuremberg-Fürth (judgment dated 21 November 2024, 4 HK O 5879/24) ruled that the Uni Immo Wohnen ZBI fund had provided investors with insufficient information about investment risks in its basic information sheet. Specifically, the court emphasised that the fund had been classified in the lower risk classes "2" and "3", even though the assessment criteria required a higher classification in risk class "6".

Key findings:

• The daily calculation of redemption prices for fund units on the stock exchange is not sufficient to meet the valuation criterion for a low risk class. The redemption prices merely represent an estimate of the quarterly valuations.
• Rather, the valuation requires a specific monthly valuation of the entire real estate portfolio. If this value is not actually determined on a monthly basis, this ruling states that a classification in risk class "6" must be made in the basic information sheet. This is a significantly higher risk than small investors are accustomed to.

This results in a significant increase in the risk assessment, which means that investors are made more aware of the increased risk of loss. In practice, a monthly revaluation of the entire fund property volume not only represents a considerable administrative and organisational effort, but also incurs high costs that would ultimately have to be borne by the investor.

In response to the court's decision, the open-ended real estate fund "Wertgrund Wohnselect D", with a fund volume of approximately EUR 332 million, has already decided to switch from quarterly property valuations to a monthly cycle as a preventive measure.

Other fund providers, particularly those with higher fund volumes, have not yet responded and have not yet adjusted their valuation cycle. 

III. Outlook

Within the industry, fund providers and distribution partners may be required to monitor risk ratings closely due to developments in case law. In order to counteract a classification in risk class "6", a monthly revaluation of the properties could be considered. This is particularly true given that risk class "6" is perceived by investors as particularly risky. This could lead to an outflow of investor funds and a reluctance to make further investments, as investors become aware of potentially higher investment risks.

The ruling is not yet final, as the fund company has appealed against it. It may therefore take some time before a court decision is handed down. In any case, the pending ruling will be groundbreaking for the residential property asset class.