Due to the currently low interest rates, investing in real estate is particularly attractive in Spain. Real estate funds are therefore of interest because an individual investor can invest in major projects, such as shopping malls or office complexes, in which he or she could not invest in as an individual. Additionally, in comparison to normal shares, investments in real estate funds are less abstract and offer the advantage, with regards to private property, that one does not have to worry about management and rental and is only required to be indirectly involved.
Generally, with a real estate fund, the money of many investors is invested in (larger) housing projects. Moreover, there is a basic distinction between open and closed real estate funds.
Open real-estate funds
With an open real estate fund, the transferred capital is invested in various properties and is open to any party interested. Basically, it involves a long-term investment. During the duration of the fund, the property portfolio is constantly changing. Due to the broad diversification, the risk is spread. Investors may also sell their shares at any time. Participation in an open real estate fund is already possible with small amounts, usually from € 50. Therefore, this type of investment is attractive for investors with less capital.
This flexible entry and exit option was meant to open real estate funds during the financial crisis, but did not meet this goal. Shortly after investing, investors would remove what they invested. Since this money was invested in real estate and could not be sold quickly, many funds were frozen and later processed (that is, the properties were sold and the investors were paid in the amount of the remaining revenues).
By investing in real estate in different countries, the risk can be spread. On the other hand, there exists the risk of fluctuations in exchange rates and in house prices within each country.
Closed-end real estate funds
As part of closed real estate funds, investors’ capital is generally invested in a particular object. Investors usually have to pay a high minimum contribution for their participation. The total capital of the fund is determined in advance. When all funds have been paid, the fund is closed, and then any new investors may enter. The closed-end real estate fund is oriented so that investors hold their shares until the end of the term and only then do they receive the proceeds from the sale of the property. The money is invested in the long term. It is therefore even more difficult for investors to get out of a closed fund. A sale is less common and can occur only if a buyer is found.
Legal forms of closed-end funds
One should also pay attention to which legal form the closed-end real estate fund is established. Most of these are operated in Germany as a limited liability partnership, but they can also operate as a civil law partnership or a general partnership. In these cases, one should be very careful because an investor is liable not only in the amount of his or her capital contribution (such as a limited partner of the KG), but with his or her entire personal fortune as well.
Due to the high investment amount to closed end funds, these funds are only suitable for investors with higher capital, who also have knowledge of the real estate sector and the construction project in order to assess the profitability of the object.
Real estate funds in Spain
In Spain, the importance of real estate funds has increased in the context of gradual recovery from the financial crisis as well as the low interest rate policy of the European Central Bank. With the onset of the financial crisis, funds had to be frozen and processed in Spain. Meanwhile, investors’ real estate funds were an interesting investment opportunity due to the low interest rates of the banks. Foreign investment companies are now investing again but this time even stronger in the Spanish property market.
Lisa Waldner & Karl Lincke
This article is not considered as legal advice