Real estate, alternative real assets and other diversions

GERMAN REAL ESTATE FUNDS Key structures for institutional investors

Residential Investor

Empowered by its economic strength, Germany is one of the most interesting markets for foreign investors, even though its legal system is not based on common law. Having performed a continuous growth within the past ten years, the German investment fund industry exceeded the EUR 3 trillion threshold of managed assets according to a BVI (German Federal Association of Investment and Asset Management) survey. More than half of this amount is managed via special funds, respectively funds in which only professional and semi-professional investors (i.e. institutional investors such as insurance companies and pension funds) are invested, whereas the doors are closed to the general public. A key differentiation concerning fund structures is whether they are open- or closed-ended. This distinction depends on the question whether the investors are entitled to return their units in the respective Alternative Investment Fund (AIF) prior to the commencement of its liquidation phase or wind-down. If this holds true, the fund is qualified as an open-ended fund. 

Even though German investment law offers a range of different investment vehicles, basically two fund structures have been proved as being most suitable for German and foreign real estate investments of German as well as international institutional investors, respectively the special contractual trust fund (Spezial-Sondervermögen) for open-ended structures and the special investment limited partnership (Spezial-Investment-Kommanditgesellschaft or InvKG) for closed-ended structures. Despite their – for the German language typical – long terminology, both fund types can be structured in an efficient way for both German and international institutional investors and German and foreign real estate.

Such regulated as well as commonly used vehicles must be managed by a licensed fund management company (AIFM or KVG). Both types of funds and their management companies are regulated by the German Capital Investment Act (KAGB), which is based on the EU Alternative Investment Fund Manager Directive (AIFMD).

Open-Ended Structure

The Spezial-Sondervermögen is a fund of the contractual type, which means that it has no legal personality but consists of contractual agreements between the KVG and the respective investors. Therefore, it cannot be registered in the commercial register and cannot be holder of rights. The assets of the fund are basically legally owned by the KVG and are managed by the KVG for the account of the fund investors. This is comparable to the English common law trust concept where the trustee holds legal title and the beneficiary holds beneficial title to the asset. A depositary supervises the compliance with certain statutory and contractual requirements.

Being qualified as an open-ended fund, the Spezial-Sondervermögen usually neither closes after having issued a pre-defined number of units or after having raised a specified amount of capital, nor does it have a pre-determined term. The frequency of the redemptions of their fund units by the investors can be agreed between the investors and the KVG, and are mostly on a monthly basis but at least once a year with potential redemption terms.

However, this redemption right is only a theoretical one for special real estate funds as often only a small number of institutional investors are invested and, therefore, the liquidity situation of the fund might not always allow the redemption of a large portion of fund units. Therefore, if institutional investors plan to disinvest, they generally elaborate a suitable action plan with the KVG.

Finally, the statutory provisions for the Spezial-Sondervermögen are stricter than those applicable for the InvKG. Especially this holds true in relation to both external and internal financing.

Closed-Ended Structure

The InvKG is in principle a limited partnership (Kommanditgesellschaft) to which the general provisions for limited partnerships are applicable but modified by German investment law; investors are invested as limited partners.

This fund vehicle was developed with the implementation of the KAGB in 2013, and it was not replicated after or based on existing retail fund models. Hence, its internal governance can be agreed in a more flexible way compared to the Spezial-Sondervermögen, and it is possible to give investors an extensive management power or veto rights; alternatively, they can also be basically totally excluded from decision making processes of the fund.

The InvKG being structured as a closed-ended fund means that it has a term, whereby the longest possible term is 20 years plus an extension of at maximum up to ten years. 

Residential Investor

About Alexandra Weis Marcel Schuster

Alexandra Weis Marcel Schuster

Alexandra Weis is partner in the Frankfurt office of King & Spalding. With more than 18 years of experience, Alexandra Weis’ practice focuses on German investment and regulatory law, fund structuring, and international and German real estate transactions. Marcel Schuster is an associate in King & Spalding's Frankfurt office and a member of the firm's Corporate, Finance and Investments practice.

Articles by Alexandra Weis Marcel Schuster

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