DWS weighs redemption curbs for German property funds as outflows strain sector

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DWS weighs property fund curbs

Highlights

DWS is considering restricting redemptions or imposing penalty fees on three German Grundbesitz property funds after €6bn outflows since 2022 halved assets under management.
German-domiciled open-ended retail property funds saw net outflows of €17.3bn in 2024 YTD, with industry assets dropping to €107bn and five funds suspending redemptions or liquidating.
Scope forecasts average returns of minus 0.5 to minus 1.5 per cent by end-2026 as managers face forced sales, declining valuations, and high financing costs in illiquid commercial property markets.

Liquidity pressure builds across DWS funds

As first reported by the Financial Times, DWS is considering limiting redemptions or charging penalty fees to departing investors under new EU rules as it tries to avoid a liquidity crunch at three German property funds.

The three open-ended Grundbesitz funds have paid out about €6bn since 2022, roughly half of their combined assets under management, according to fund disclosures. To meet those withdrawals, the funds have sold €4.5bn of property and increased borrowing toward statutory limits.

The pressure on the German vehicles comes as DWS is also winding down a smaller U.S. retail property fund. RREEF Property Trust, which had a net asset value of $203mn at the end of June, plans to liquidate after persistent redemptions and weak inflows.

Industry outflows deepen structural risk concerns

Investors have withdrawn a net €17.3bn from German-domiciled open-ended retail property funds since the start of 2024, cutting industry assets under management to €107bn by the end of July, based on Bundesbank data. BaFin tells the Financial Times that outflows remain high and warns more funds could suspend redemptions, although it does not see an acute systemic threat to the wider financial system.

The sector is under strain because the funds mainly hold illiquid commercial properties, with offices accounting for more than half of assets. Managers can be forced to sell buildings into a market marked by weak demand, lower valuations and higher financing costs, increasing pressure on returns and liquidity.

Scope analyst Sonja Knorr says persistent selling pressure and redemptions can force further asset sales and valuation cuts. Scope forecasts average property fund returns of between minus 0.5 per cent and minus 1.5 per cent by the end of 2026.

Five smaller German open-ended retail property funds have already suspended redemptions or entered liquidation this year. Although investors generally must give 12 months' irrevocable notice before withdrawing money, that safeguard can still leave managers exposed when property disposals take just as long or transactions collapse.

The turmoil is also reviving scrutiny of how the products are marketed and rated. Consumer advocates say some investors viewed them as safe, liquid alternatives to deposits despite upfront charges, ongoing fees and discounts of up to 38 per cent on the secondary market, while BaFin is pushing for changes that would result in higher EU risk ratings.

In our earlier article on the U.S. office property downturn spilling into CMBS markets, we described how high interest rates and a large wave of maturing loans are shifting stress from landlords to holders of securitized debt. Using Chicago’s Aon Center as an example, we noted that refinancing strain and weakening property fundamentals can push losses through the capital stack and increase risks for commercial property investors.

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