German real estate markets expensive for institutional investors
According to the fourth annual survey by Universal-Investment on the behaviour of institutional investors, prices for new investments in Germany are considered by many respondents to be high.
Geographically, North America is notching up disproportionate gains on the investor preference scale. As regards the use sectors for new investments, office real estate remains weak. In yield terms, the current return is of key significance for investors and three quarters plan to focus on Master KVGs for new investments. Institutional investors managing assets totalling some EUR 50 billion took part in the survey. The respondents' real estate capital amounts to EUR 5.4 billion.
For 37 per cent of the respondents, real estate prices in Germany are no longer acceptable
Around half of respondents consider real estate prices in Germany to be high but still marginally acceptable. A further 37 per cent consider the prices to be too high. The situation on other European markets is far less tense, with only one quarter of respondents viewing prices as unacceptable. Outside Europe, only 12.5 per cent find real estate prices inappropriately high. In line with the assessment of prices for new investments,
Germany is also becoming less popular on the investor preference scale. Investors plan to make only 45 per cent of new investments on the German market (previous year: 67.5 per cent). Preference for the rest of Europe remains good, with slight gains being recorded to 25 per cent (previous year: 22.5 per cent). North America, by contrast, achieved significant gains in this area, with respondents declaring their intention to make 19 per cent of new investments in this region (previous year: 5.7 per cent). Asia also gained 1.8 per cent to eight per cent.
"This trend is commensurate with the analyses of the real estate portfolios on our platform, with the share of North American real estate having already risen in the past twelve months by one third,” explains Alexander Tannenbaum, Managing Director responsible for the real estate business of Universal-Investment.
According to the survey, investors do not plan to expand new investments in office real estate significantly. The share of respondents keen to make new investments in this segment remains more or less unchanged, at 37 per cent. In the area of new investment projects, an increase was recorded among retail objects from some 21 per cent in the previous year to approx. 25 per cent. Interest in the logistics segment has risen. Readiness for new investments has climbed here from some 8 per cent in the previous year to around twelve per cent. The residential segment dropped to around 19 per cent from some 34 per cent in the previous year. "Institutional investors are also increasingly diversifying their real estate portfolios across sectors and markets, and rightly so,” Tannenbaum says.
Seventy five per cent want to invest in real estate via Master KVG solutions
"For some years now we have been experiencing a visible trend towards Master KVGs with a split of administration and asset management. In the area of securities funds, significantly more than 70 per cent of institutional funds are already being managed on the basis of Master KVGs. This accelerating trend can also be seen among real estate investments", Tannenbaum explains. The survey reveals that three quarters of respondents plan to use a Master KVG in the next twelve months (previous year: 36 per cent). "All in all, the greater flexibility offered by Master KVGs for selecting the best asset manager and the enhanced transparency compared with solutions from one source are crucial for the investors' choice of Master KVGs,” Tannenbaum continues.
For a good 62.5 per cent of surveyed investors (previous year: 82 per cent), cash flow returns continue to play a key role. Compared with the previous year, the share of respondents focusing on the internal rate of return (IRR) for a profitable sale of real estate has therefore virtually doubled to around 37.5 (previous year: 18.2) per cent. The respondents to the survey have been winding down their cash flow expectations and now expect a minimum return of 4.1 per cent (previous year: 4.2 per cent).
The survey shows that institutional investors are relying more and more on indirect real estate investments for their new investments, with some 87 per cent of new investments likely to be made by way of fund investments in the next twelve months. Direct real estate investments have fallen further to 13 per cent, evidencing the ongoing trend towards indirect investment vehicles. In the previous year's survey, the rate of those in favour of the indirect alternative was already at 55 per cent.
As regards the choice of the preferential indirect investment vehicle for new investments, the open-end real estate special fund organised under German law (the “Spezial-AIF” as defined in the German Investment Code (KAGB)) is proving extremely popular, with the majority of all new investments expected to flow into these real estate special funds. Demand for other indirect investment vehicles is lower. Around 12.5 per cent will be directly invested. "Indirect investment vehicles are becoming more and more popular. This is also reflected in the demand in our own company. The fact that the real estate special funds continues to play such a key role in investment vehicles is interesting,“ Tannenbaum says.