Among investors the attraction of real estate grows more than ever Source: iStock

Real estate – stable value and reliable returns

Author: Alexander Tannenbaum, Managing Director Universal-Investment

As interest rates remain low, the attraction of real estate grows more than ever among investors who show a clear home bias and reshuffle portfolios more actively than before. The asset class poses specific challenges for KVGs and asset managers, however, this article presents current developments and highlights key requirements of real estate investing.

Alexander Tannenbaum, Managing Director Universal-Investment

The deal announced last October is indicative of a new trend: Bayerische Versorgungskammer (BVK), Germany‘s largest institutional investor, launched two real estate umbrella funds with a targeted investment volume of EUR 3.6 billion together with Universal-Investment. The administration and the asset management function for the two umbrella funds, which are structured as Luxembourg-based AIFs, have been separated: the umbrella structures contain seven sub-funds overall each of which is managed by a specialised real estate asset manager that implements a focused strategy.

Low or negative yields for bonds and low-risk liquid investments leave institutional investors with precious little scope in the traditional investing space. That is why large investors turn increasingly to real estate investments packaged in regulated vehicles. Real estate is considered a relatively stable asset class with strong returns, as has also become clear in a survey conducted in October 2016 by Universal-investment’s “Future Forum”. When asked, which “alternative investments” they would take exposure to in the next 24 months, the participants mentioned real estate in second place after the loan/private debt asset class. Real estate has by now reached a volume of over EUR 7 billion on Universal-Investment‘s platform, bringing the combined share of real assets and property from less than one percent at the beginning of 2012 to significantly in excess of 10 percent. Data collected by the German fund association BVI also shows that institutional investors in particular look increasingly to investing in real estate via regulated vehicles: between July 2013 and July 2016, assets under management in separate real estate funds grew by 54.2 percent while mutual real estate funds gained 6.9 percent in volume.

Investors expect maximum regulatory flexibility

Alexander Tannenbaum ,
Managing Director, Universal-Investment

Apart from separate real estate funds, investors also increasingly turn to new products regulated under the investment law such as the Investment-KG, the Luxembourg Limited Partnership (SCS) or the Reserved Alternatives Investment Fund (RAIF). The regulated fund universe is growing as a result, whereas most unregulated investment funds are no longer permitted or fail to attract sufficient interest. Whatever vehicle investors eventually go for, however, they should make sure that the fund structure adequately reflects their own structure and individual investment objectives. Making these choices requires ever greater expertise at the KVG and custodian level because investors expect maximum regulatory flexibility in Germany or Luxembourg and reliable product regulation as well as a cost efficient structure that remains manageable from an administration perspective.

Master funds offer greater flexibility and transparency

The master-KVG concept that has been successfully established for securities investments since the 1990s is also proving increasingly in demand among real estate investors as a result of their greater demands on flexibility, reliability and efficiency. Some 73 percent of securities funds are now managed via Master-KVG solutions and their number is also rising significantly in the real estate space. Investors benefit in several ways.  Not every administrator is an outstanding asset manager, and excellence in asset management does not necessarily come with strong administrative skills. The answer is a division of labour between a master capital administration company or KVG and individual partners who all play to their respective strengths. For the master-KVG, this means providing fund and administration services, fiduciary and oversight under the investment law as well as separate account structuring, inception and administration including risk controlling, fund accounting and the important reporting services.

Specialists beat generalists

Meanwhile, the master fund set-up leaves the asset managers free to focus entirely on their core competencies: the search for and the acquisition and management of the most compelling investments. Investors benefit from greater ease in selecting managers based on the best-in-class principle since the individual properties in a master fund structure are owned by the master-KVG under civil law, not by the asset manager. As a result, asset managers can be exchanged without tax implications. The master-KVG structure also makes it easier for foreign asset managers to offer their expertise to German investors because they need not go to the trouble of setting up their own KVG.

Transparency and efficiency

Master-KVG solutions also allow for standardised and centralised reporting. By pooling information in actual fact or virtually, investors obtain a detailed overview across all asset managers and asset classes without the need to compile holdings from different KVGs. Furthermore, the reporting tools of a master-KVG can identify hidden risks and enable overlay risk management across all investments and funds. The Master-KVG also doubles as a regulation platform and handles the statutory notification and reporting requirements or reporting under Solvency II on behalf of investors.

Zoom

In addition, the division of labour between asset managers and the administrator makes the true costs for the services more transparent. Generalists, i.e. KVGs that provide administration and asset management from a single source, frequently charge one single price for the entire package, which makes it impossible for investors to identify the costs of the individual components. While the sum total of all obvious and hidden costs may be fairly similar in both models, the Master-KVG structure provides greater efficiency, transparency and control, which speaks in favour of this approach.

Buy-and-hold no longer the norm

The increased importance of flexibility in real estate investing is also clearly reflected in the behaviour of institutional investors as has been demonstrated by a study of Universal-Investment that looks back over the past three years and a total investment volume of about EUR 6.5 and provides a detailed analysis of clients’ property portfolios at the individual property level (as at: 30 September 2016). The most important finding: institutional property investors take a much more active approach to strategic portfolio management than originally anticipated. In spite of or perhaps because of performance pressures, holdings in property portfolios are increasingly optimised to maximise yields. Certain portfolio changes over that time frame are the result of new investments. However property sales, reallocations and, as such, active management play an increasingly greater role. Investors looking for new investments are facing the challenge of finding solid properties with strong cash flows or, more precisely, strong total returns, which means that ever more money chases a smaller number of suitable properties.[BA1]  However continually optimising the allocation is part and parcel of any successful long-term real estate investment in a competitive market. It appears that institutional investors increasingly manage to succeed on both counts together with their chosen service providers.

Office properties lose in importance, specialist retail properties more in demand

Universal-Investment‘s analysis suggests that investors sell lower yielding properties and reinvest the money in more lucrative opportunities. Changes in the retail property space in particular show that institutional investors increasingly follow current trends and market developments. In May 2014, office properties still clearly led the field with an overall share of 41 percent; by the end of September 2016, their share had fallen to only 28 percent. Demand for shopping centres with office space attached has also declined from 27 percent to 14 percent. Residential properties, on the other hand, now make up a much larger portion of investment portfolios, up from six percent in May 2014 to now 18 percent. Similarly, institutional investors increasingly favour specialist retail properties whose share has risen from 18 to 24 percent.


Zoom
Source: Universal-Investment

Allocation still favours Germany, exposure to Asia declines

The significant shift in regional allocation also illustrates that the outlook and expectations for the development of regional property markets is more strongly reflected in portfolios these days. German real estate, which continues to account for almost half of the overall portfolios, is still on top of investors’ agenda, whereas, surprisingly, the views on Asia have changed: even though the Far East is generally considered an important market of the future, property investors cut their exposure in the region from previously 15 percent to now only six percent as they seem uneasy about some of the economically more volatile markets with higher currency risks. Instead, investors prefer to focus on their currently attractive home market and comparatively stable international property markets. The share of Europe in portfolios increased from 15 to 24 percent, North America gained slightly from 13 to 15 percent. 

Zoom
Source: Universal-Investment

Three questions for Alexander Tannenbaum, Managing Director Universal-Investment

Universal-Investment: Mr Tannenbaum, which advantages can institutional investors expect from the company and its property platform?

Alexander Tannenbaum: Our solutions meet all the needs of investors and asset managers, including the integration of all properties into a single portfolio platform that gives investors full transparency down to the single property level, aggregated reporting, standardised valuation services, structuring/asset allocation [BA1] oversight and monitoring as well as professional risk management. Investors are also no longer required to consolidate their holdings and managers and properties can frequently be exchanged without tax implications. Properties can also in principle be included in commingled schemes without giving rise to stamp duty in carefully assessed circumstances. Finally, investors who partner with us need significantly less staff to manage their property investments.

Universal-Investment: What is the company's current position in the real estate space?

Alexander Tannenbaum: To this day, we have already acquired about 550 properties with a total transaction volume of over EUR 7 billion together with 30 international asset managers on our platform – for 39 property funds already launched under German or Luxembourg law and 17 real estate sub-funds of separate accounts. This has to all intents and purposes given us a market share of roughly 10 percent. Our committed capital amounts to approximately EUR 11 billion, EUR 4.6 billion have been invested. We have also bought domestic and international shareholdings and open-ended property target funds for EUR 800 million on behalf of existing master funds. These acquisitions confirm what our analyses of investor behaviour have already shown: institutional investors take a more active approach both in terms of real estate overall and in terms of allocation – from regional and sector weightings to the management of properties.

Universal-Investment: What are your goals?

Alexander Tannenbaum: We want to build a two-digit share in the growing market of institutional property investments over the medium term. And we want to bring our assets under administration to approximately 10 percent of the gross real estate property fund AUM over the next decade. Finally, we want to be the market leader in administration – independently of the asset class.

Author: Alexander Tannenbaum, Managing Director Universal-Investment
Date of issue: 3/1/2017