A lot of real estate funds were hit hard by the 2008 financial crisis. Today, many investors are faced with the question of how stable their holdings in real estate funds are given the crisis surrounding the coronavirus.
Real estate and real estate funds are considered by many investors to be a safe investment. Yet even this supposedly safe bet cannot weather crises unscathed. We at the commercial law firm MTR Rechtsanwälte can report that the 2008 financial crisis resulted in open-ended real estate funds, in particular, experiencing major financial difficulties, with investors suffering losses.
Today, open-ended real estate funds are structured differently, with a two-year holding period and a one-year notice period preventing investors from withdrawing major stakes in their holdings within a short timeframe. The coronavirus pandemic may nonetheless be a source of problems for real estate funds. The longer the crisis continues, the greater the risk of missing rent payments or vacancies. Properties may fall in value, with this ultimately impacting fund returns and profitability.
How, for instance, the commercial, catering, and hotel sectors will weather the coronavirus crisis remains to be seen. Insolvencies are to be expected. This may result in vacant stores and properties. Under such circumstances, it is doubtful whether the current rental prices can be maintained if there are fresh negotiations.
A decrease in the number of business trips together with greater adoption of technical solutions, such as video conferences, is also to be expected going forward. There would be a drop in the demand for hotel rooms.
Within a short period of time, these developments would have an effect on real estate funds as well. A lot of these funds include investments in hotel, catering, and office buildings. Decreasing rental income or vacancies could put the profitability of funds at risk.
Repercussions of the coronavirus crisis also cannot be ruled out for the private housing market. Real estate funds should anticipate the possibility of decreasing rental income in this sector as well.
For anyone investing in real estate funds, this means their hopes of a reasonable rate of return might not be realized and that their investment is by no means as safe as it was portrayed at the time of their consultation. That being said, investors are entitled to receive adequate investment advice. This includes information about the risks associated with the investment in question, especially as regards the risk of the investment being written off.
Failure to provide this information may give rise to claims for damages. Lawyers with experience in the field of capital markets law can offer advice.
For more information: