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Cash strapped German open ended real estate funds start selling

'The worst is yet to come. There's too much uncertainty in the financial markets. Nobody is in any hurry to invest in open-ended property funds right now,' said Bjoern Drescher, head of consultancy Drescher & Cie, in Frankfurt.

Opened-ended funds, at least in theory, allow investors to inject or redeem their money on a daily basis.

Germany's property funds, with over €80 billion in assets, spent massively in recent years to snap up prime buildings from the pricey West End of London to Tokyo's glitzy Shinjuku district.

But some of these former white knights are now exiting the market as panicked German investors withdraw cash and force the funds to freeze redemptions and sell assets.

'There is a real vacuum right now, especially for larger lot sizes up to £100 million which only the German open-ended funds could afford to buy,' explained Chris Gore, a partner at UK property broker King Sturge.

Although some analysts are predicting a bottom in 2009, property players said investment enquiries from German funds have fallen by over 50% and that spells more trouble for sellers hawking higher-grade assets.

They are big players in European property markets. Data from mutual funds association BVI show that German property funds raised a record €6.7 billion of purchasing power in 2007 but this reversed to a net outflow of €234 million in the first 11 months of 2008.

According to Property Data, German funds were the second-largest foreign investors in UK commercial real estate last year after oil-rich buyers from the Middle East, spending nearly £1.9 billion pounds, or 8% of total deals done.

Although to a lesser extent than in Europe, some German open-ended funds are also heavily invested in Asia, analysts said, where the most successful now have up to 30% of their assets in countries such as Japan and South Korea.

Many of the German open-ended property funds are having problems with the properties they bought at the peak of the cycle and are facing valuation downgrades, according to Eckhard Sauren, head of German fund-of-funds company Sauren.

Some of these funds could now be forced to sell off their own portfolio and axe planned acquisitions, as they seek to raise cash to pay off investors.

German funds have already scrapped plans to buy a pair of up-market City of London office buildings priced at over £150 million pounds each – 88 Wood Street, designed by London's Millennium Dome architect Richard Rogers, and UBS-owned Milton Gate.

'Forced sales are the key indicator of re-pricing and Germany appears to be next in line after the UK to produce a string of cash-strapped fund sponsors bringing assets to market,' said property brokers Jones Lang LaSalle.

But some daring German funds continue to see the current property market downturn as an opportunity to pick up bargains, and welcome the reduced competition. DekaBank, Germany's largest manager of property funds, said that it expects to invest about €1.7 billion in 2009 through its real estate funds.