The InvG regulates open-ended real estate funds. An open-ended real estate fund has no legal personality, but is a separate asset pool, which is funded by investors' contributions. The assets pooled in the open-ended fund are legally owned by the fund management company, which is the registered owner of the fund's properties and other assets. The fund management company holds the asset on trust for the investors.

Only regulated investment fund management companies (Kapitalanlagegesellschaften) (KAGs) which are admitted and supervised by the German financial supervisory authority (Bundesanstalt für Finanzdienstleistungsaufsicht) (BaFin) can manage open-ended funds. These fund management companies must be organised as either a:

Fund management companies must:

In practice, fund management companies are mostly organised as German GmbHs. They are not usually owned by investors, but by commercial banks and insurance companies. Therefore, commercial banks play an important role in brokering fund sales, as these banks use their extensive network of branches throughout Germany as distribution channels.

The management of an open-ended fund by the KAG is supervised and controlled by a custodian bank (Depotbank), which protects investors' rights and interests. All payments for the open-ended fund account must be made to and from a separate account that is held and controlled by the custodian bank. The KAG requires the consent of the custodian bank for a number of measures, including the:

The custodian bank's control rights are secured by different methods, such as the requirement to register the approval right in relation to the disposal and/or encumbering of property in the land register.

To reduce risks, open-ended funds can only invest in certain types of assets set out in the InvG.

Open-ended funds can only generally invest in rights in rem, that is the freehold ownership of properties and similar rights. This excludes, for example, an acquisition in leasehold. Under certain conditions, open-ended funds can also acquire shares in property-owning companies. One of these conditions is that the control rights of the custodian bank are secured by an agreement between the property-owning company and the fund.

Before acquiring a property, the open-ended fund must obtain an independent expert's property valuation. The acquisition can only proceed if the purchase price does not exceed the valuation price.

Open-ended funds must mainly invest in property that is (InvG):

The fund contractually defines the geographical regions in which the fund can invest. The InvG generally allows international diversification and German open-ended real estate funds actively invest abroad. Currently, about 28% of assets managed by open-ended real estate funds are located in Germany. More than 50% of assets are located in other EU countries. To avoid conflicts of interest, an open-ended fund cannot buy properties from its KAG or a company that is affiliated to its KAG.

The InvG contains a number of provisions which are intended to achieve diversification of investment risks. For example:

German open-ended real estate funds traditionally favour assets in:

Open-ended funds can only take up loans:

Encumbrances on the fund's properties which secure loans cannot exceed 50% of the aggregate value of the fund's properties, and are only permitted with the custodian bank's consent (see above, Permitted assets).

The sale of properties by an open-ended fund usually requires an independent expert's valuation (see above, Permitted assets).

This restriction does not apply if the fund is closed for redemption (see below, Emission and redemption of shares). In this case the assets can be sold under appropriate conditions to gain liquidity.

Shares in the open-ended funds are backed by the properties and by the liquid assets held by the funds. Investors can buy shares at net asset value that are newly created, by contributing to the funds. Open-ended real estate funds are not companies, but are separate asset pools held and managed by the fund management company (see above, Separate asset pools without legal personality). A purchase of shares in the fund is therefore a contribution into the separate asset pool on an open-ended basis. Open-ended real estate funds have attracted many private investors. However, these funds can and have been set up of institutional investors. Private investors are commonly asked to pay an offering charge of about 5% on top of the purchase price.

Open-ended real estate funds must redeem the shares at the prevailing net asset value. Prices for the shares are quoted, and shares are regularly redeemed on a daily basis. Since 2007, the funds' contractual terms can stipulate that shares can only be redeemed once a month, if the total value of the shares submitted for redemption exceeds a contractually agreed threshold.

The shares are normally unlisted. The prices for redemption are based on regular valuations of the properties and liquid assets at that time. The value of any financial assets in the fund is determined according to its market price. However, a panel of experts establishes the value of each property. Currently, the whole portfolio must be evaluated on a rolling basis every 12 months. Newly acquired properties are valued at the purchase price for the first year following acquisition. This leads to staggered valuations of the entire portfolio.

Open-ended real estate funds can be exposed to liquidity risks, because a large part of their assets comprise illiquid real estate, whereas their shares are redeemable on a daily basis, which can trigger considerable need for liquidity.

The InvG takes this into account and provides various safety mechanisms to limit the risk of liquidity crisis, including that:

In addition, the offering charge (see above, Emission of new shares and share redemption) and the staggered valuation of the properties (see above, Emission of new shares and share redemption) limit the attractiveness of frequent transactions.

If all these instruments fail, then as a final option (though frequently used in recent years) open-ended real estate funds can be closed. Open-ended real estate funds can delay the redemption of shares for up to one year if they lack sufficient liquidity. The period can be contractually prolonged for a further year. In this period, the funds must try to gain liquidity by selling off properties and other assets, or increasing the loans on their assets.

The Government's Draft Act contains measures which are intended to reduce the risk of the closure of open-ended real estate funds. If adopted, the reforms would considerably change the character of these funds, particularly for non-retail investors.

Restrictions concerning the redemption of shares. Under the Government's Draft Act, the issue and redemption of shares in open-ended real estate funds would be subject to considerable restrictions. However, while the Discussion Draft provided that the issuance and the redemption of shares in open-ended real estate funds would only be possible twice a year, the Government's Draft Act takes a less restrictive approach as it allows, but does not make compulsory, the contractual fund rules to provide fixed-redemption dates.

However, the Government's Draft Act, like the Discussion Draft, proposes that the redemption of shares should generally be subject to a compulsory lock-in period of 24 months, that is, investors would have to invest their money in the portfolio for at least two years.

In addition, the Government's Draft Act proposes that, for another two years following the 24-month lock-in period, any redemptions should be subject to "redemption discounts" of 10% and 5% after the third and fourth year respectively. There is an exception, which has received much attention: these restrictions do not apply to withdrawings of up to EUR5,000 per month, and therefore funds can redeem shares without complying with lock-in periods and redemption discounts to the extent that the relevant investors did not ask for redemption payments above that figure. By establishing this exception, the government complied with critics questioning the future attractiveness of the investment product for typical retail investors.

Finally, the lock-in period will not apply to investors who made their investments before the fund rules are amended under the new law. Therefore, old investments can be redeemed in excess of EUR5,000 immediately, subject to the redemption discounts (see above).

No increase of the compulsory liquidity reserve. The Discussion Draft suggested an increase of the compulsory liquidity reserve of the funds from the current 5% to 15%. (At the same time, the Discussion Draft allowed for a reduction to zero, if certain requirements were met.) The government, however, decided in the Government's Draft Act not to follow this suggestion and proposes to explicitly order that the 5% liquidity reserve must be available for redemption of shares.

No compulsory listing of shares. Further, the Discussion Draft proposed that open-ended real estate funds would have to list their shares at a stock exchange in the EU. The intention was for investors to try to sell their shares at the stock exchange instead of submitting them for redemption. Again, the Government's Draft Act has not followed this proposal.

The reforms also propose changes in asset valuation. The Government's Draft Act provides for gradual changes including:

The Discussion Draft had suggested that the open-ended funds' properties, and thereby indirectly the redemption price of the shares in these funds, should always be valued with a general discount of 10%. Critics deemed this proposal as an expropriation, which is commonly believed to be the main reason for the drain of liquidity in May 2010. Again, the Government's Draft Act did not adopt this proposal.

Finally, the reform proposes a staggered mechanism in the event that a fund is closed:

This also applies if the fund cannot redeem shares for more than three times within five years.