BERLIN-The German federal government has not dropped plans to impose a 10% across-the-board valuation discount on open-end property fund portfolios in the framework of new legislation to be proposed before the summer. However, industry specialists remain convinced that its imposition, if it occurs, will damage the $110 billion sector and could be its death knell.

Industry sources say that a wide-ranging discussion at the federal finance ministry in Berlin at the end of last month between numerous real estate fund representatives did not touch on the discount at all. It focused mainly on Berlin proposals for a minimum investment period, redemption notice, and possible separate treatment of institutions and private savers.

However, there is no indication that Berlin has dropped the idea. “It is quite clear that this is not off the table yet,” said one source, requesting anonymity. “But it is equally clear what institutional investors will do if this is part of the legislative proposal; they will simply transfer all their investments out of this vehicle so that such a move would actually just be a way for fund managers to earn fees and agios (entry fees) for reinvesting in other vehicles.”

The federal finance ministry early last month proposed that property portfolios, under a new law, be first depreciated by 10% to avoid the precipitous write-downs that two funds have been obliged to announce over the last 12 months - Morgan Stanley’s P2 Value, and Degi Global Business, owned and managed by Aberdeen Asset Management. Each, coming at different times, sparked nervousness among all real estate OEF investors and caused runs on capital cited by competitors as forcing them also to close for redemptions.

Although many specialists have proposed legislation that sets a clear separation of vehicles for institutions and retail investors, the large Berlin meeting - which grouped around 30 representatives from open property funds and almost the same amount from closed property funds, which cater mainly to German domestic investors - heard that with major banks advising most private investors, the latter group tends in any case to act in concert. This blurs the differences between the two, and makes a division along the lines of ‘natural’ or ‘non-natural’ persons unviable.

Allan Saunderson is a managing editor of Property Investor Europe and a contributor to GlobeSt.com.