Open-end real estate funds

Open-end real estate funds are collective investment schemes that pool the money of many investors and invest it in a diversified portfolio of commercial and residential real estate. Unlike closed-end real estate funds, investors can generally redeem their shares at any time-though, since the 2013 fund regulations, they are subject to a minimum holding period of 24 months and a 12-month notice period. Open-end real estate funds are regulated investment vehicles under the German Capital Investment Code (KAGB) and are managed by an asset management company (KVG).

How They Work and Portfolio Structure

Open-end real estate funds invest primarily in commercial real estate (offices, retail, hotels, logistics) in European and international metropolitan regions. A portion of the fund’s assets-typically 15-30%-is held as a liquidity reserve in money market instruments and bonds to cover redemptions.

The net asset value (NAV) is calculated daily and is based on regular appraisals of all fund properties. These appraisals are prepared by independent experts, typically once or twice a year. Between appraisal dates, the NAV therefore does not immediately reflect market changes-a structural feature that can lead to the so-called NAV illusion in times of crisis.

The distribution yield ranges between 1.5% and 3.5% per year, depending on the fund; added to this are increases in the value of the properties, which are reflected in the share value. The total return (performance) of the best-known German open-ended real estate funds has been 2-3% per annum in recent years-significantly more stable than stocks, but with a correspondingly moderate level of returns.

Major German Providers

Among the largest open-ended real estate funds in Germany are:

• Deka Immobilien (DekaBank): including Deka-ImmobilienEuropa
• Union Investment (Volksbanken): including UniImmo: Deutschland
• DWS: including Grundbesitz Europa
• Commerz Real: Hausinvest

These funds are broadly invested across European real estate markets and show little regional correlation with direct real estate in Nuremberg.

Tax Treatment for Private Investors

For private investors, income from open-ended real estate funds is subject to the withholding tax (25% plus the solidarity surcharge and, if applicable, church tax). However, due to the partial exemption under the InvStG 2018:

• 60% of distributions and capital gains are tax-free for real estate funds with a predominantly domestic portfolio
• 80% of distributions and capital gains are tax-free for funds with a predominantly foreign real estate portfolio

This partial exemption makes open-ended real estate funds more attractive from a tax perspective than many other asset classes: The effective tax rate on income from a foreign real estate fund is only approximately 5% (25% of the 20% taxable portion).

Calculation example:

• Distribution: €3,000
• Tax-exempt portion (80%): €2,400
• Taxable: €600
• Withholding tax 25%: €150
• Effective tax rate: 150 / 3,000 = 5%

By comparison: Interest income from money market accounts is taxed in full at a 25% withholding tax rate.

Opportunities and Risks Compared to Direct Investment

The advantage of open-end real estate funds lies in broad diversification, professional management, and a low minimum investment amount (starting at approximately €50 for a savings plan). Disadvantages include management fees (TER of 0.5-1.5% p.a.) and limited influence over the portfolio.

Advantages and disadvantages compared to direct real estate:

Criterion	Open-end real estate fund	Direct real estate in Nuremberg
Minimum investment	from €50	from approx. €200,000
Management costs	none	medium to high
Liquidity	limited (24-month holding period)	very limited (months)
Return	2-3% p.a.	3-5% net p.a. (Nuremberg)
Appreciation	moderate	significant depending on location
Tax benefits	partial exemption	depreciation, income-related expenses
Owner-occupancy possible	no	yes

Investing regionally in Nuremberg residential real estate offers advantages over a fund: leveraging local knowledge, identifying specific appreciation potential, utilizing tax-deductible depreciation, and moving in yourself if necessary.

Minimum Holding Period and Liquidity Management

The minimum holding period of 24 months, in effect since 2013, and the 12-month notice period are intended to prevent mass redemptions during times of crisis. Investors must give at least 12 months’ notice of their intention to redeem shares and must have held the shares for at least 24 months.

In practice, this means: Anyone who buys fund shares in January 2025 can announce the redemption no earlier than January 2026-and will then receive the money back no earlier than January 2027. Open-end real estate funds are therefore not suitable as a short-term parking spot for liquidity.

Practical Tip for Property Owners in Nuremberg and Franconia

Property owners who wish to invest proceeds from a real estate sale in the interim before reinvesting in direct real estate can use open-end real estate funds as a transitional investment-but should be mindful of the holding periods. Those who plan to buy again within two years are better off with a money market account or a short-term bond fund.

As a component of a long-term real estate portfolio, open-end funds can be useful: They offer international diversification into a segment (commercial real estate) that private investors can hardly access through direct ownership. We recommend subscribing to open-end real estate funds only in consultation with a financial advisor-especially with regard to holding periods, tax planning, and personal liquidity planning.

Frequently Asked Questions

What happens if an open-end real estate fund closes?

In the event of a crisis, a fund may be temporarily closed for redemptions. If the closure lasts too long, the fund is liquidated and the properties are sold-investors then receive their share of the proceeds. The 2013 regulation establishing minimum holding and notice periods is intended to prevent such forced closures by stabilizing the funds’ liquidity base. During the 2007-2012 financial crisis, several large open-ended funds had to be closed and were subsequently liquidated-including SEB ImmoInvest and Kanam Grundinvest.

Is an open-ended real estate fund safer than a direct investment?

Open-ended real estate funds are more broadly diversified, but they are not risk-free. Declines in the value of real estate in the portfolio-e.g., due to falling office property values as a result of work-from-home trends-directly affect the share price. Liquidity is limited by holding periods. Compared to stocks, price fluctuations are smaller, but the risk of loss exists. A direct real estate investment in a good location in Nuremberg has historically been less prone to fluctuations and also offered opportunities for personal use.

How high are typical sales charges?

Front-end loads for open-end real estate funds typically range between 3% and 5%. Through online platforms or fund discounters (e.g., ING, comdirect, Ebase, fondssupermarkt.de), they can often be reduced to 0% to 1.5%. When setting up a savings plan, it is particularly worthwhile to compare platforms, as the front-end load significantly reduces the effective return.

How are open-end real estate funds treated in an estate?

Fund shares are included in the estate like other securities and are valued at fair market value (NAV). They are subject to inheritance and gift taxes. The more favorable valuation rules that apply to directly held real estate (Section 13d of the Inheritance Tax Act, exemption rules under Sections 13a and 13b of the Inheritance Tax Act) do not apply to fund shares. For inheritance tax planning, direct real estate ownership is more favorable than fund shares in many scenarios.

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