Tenth annual real estate survey: Institutionals’ portfolios becoming more diverse and more international
30. September 2022
Frankfurt am Main
- Dominance of German and European real estate decreasing, North America and Asia gaining in significance
- Coronavirus-driven slump in demand for logistics properties overcome, retail properties now just as popular as in 2017
- Two out of three investors prioritise cash flow return, expected return on investment increases to an average of 3.85% for core assets
- Effective protection against inflation: nine out of ten investors intend to maintain or expand real estate allocation
According to the annual Universal Investment real estate survey1 , which has now been conducted for the tenth time, German institutional portfolios are increasingly being diversified in terms of their usage types and geographical target markets. While the domestic market in Germany and the other countries of Europe continue to account for the bulk of the invested assets, over the course of the past decade North America and Asia have increasingly gained in significance. With a view to usage types the one-off effects of the coronavirus pandemic declined noticeably in 2022, with demand for logistics and trade properties profiting, while demand in the residential segment has normalised. The clear hike in interest rates and the rising rates of inflation are also having a significant impact.
Thus, for instance, for the first time in many years investors are now clearly focusing on the recurring cash flow return on real estate investments. Likewise, the expected returns on investment are again increasing for the first time in years, and at 3.85% have reached their highest level since 2018. In this respect the vast majority of investors – approx. 95% - regard the real estate asset class as effective protection against inflation. Accordingly, nine out of ten investors intend to at least maintain or increase their allocation in real estate.
“As the coronavirus pandemic ebbs the sustainable impact of structural megatrends is again having a positive influence on the institutional real estate market. Internationalisation and differentiation by usage types, and especially in what were previously niche markets, are moving forward. Here investors are increasingly endeavouring to profit from developments such as digitalisation, urbanisation and demographic change. This once again underlines the importance of a long-term investment horizon in the strategic management of real estate portfolios,” comments Axel Vespermann, Head of Real Estate at Universal Investment.
Domestic market Germany and Europe remain important, but North America and Asia gain in significance
In 2022 the portfolios of existing properties of the surveyed institutional investors were distributed as follows: 66.9% in Germany, 17.4% in other European countries, 7.4% in North America, and 4.2% in Asia. The remaining 4.1% was accounted for by miscellaneous markets in Oceania and threshold countries such as Brazil. Thus there has been a decrease in the significance of the German (-0.9 percentage points) and the European market (-4.7 points) in a comparison with the previous year, while North America (+0.6 points) and Asia (+0.9 points) gained in popularity. Compared with 2014 this development is even more striking: since then there has been a decline in the German (-5.1 points) and European (-6.9 points) shares, whereas North America (+5.2 points) and Asia (+3.4 points) increased appreciably.
A similar trend may be observed with future new investments. Investors are planning on an average allocation of 57.7% in Germany, 20.8% in Europe, 10.8% in North America and 8.9% in Asia.
Corona-driven slump in demand for logistics properties overcome, retail now just as popular as in 2017
After the 2021 survey was conducted in what was an extraordinary year in many senses, 2022 revealed some major changes in the popularity of various real estate usage types. With regard to future investment plans, the office segment once again took first place for the first time since 2019 with 34.7% (+1.2 points over the previous year). The reason for this development was above all normalisation of the popularity of the residential segment compared to the record figure seen in 2021 (41.4%), with this segment taking second place this year (24.4%). In terms of decreasing significance came the usage types logistics (17.5%), retail (13.7%), other (9.2%) and hotels (0.8%). In particular retail (+8.5%) and logistics (+8.3%) saw strong growth, whereby retail properties experienced levels of demand last seen in 2017 and there was greater demand for logistics than ever before.
Cash flow is king – expected return on investment increases to 3.85%
In the face of increasing interest rates and rising inflation, institutional investors are giving much greater consideration to the recurring cash flow return. 63.2% of the respondents stated that this was where they placed the main focus in their assessment of real estate investments, compared to 25.0% in the previous year and 50.0% in 2020. The total return under the BVI method is regarded by 21.1% of investors as the key factor, while 15.8% prioritise the realised total return using the IRR method. The average minimum expected cash flow return on the part of the respondents increased for the first time since 2019, rising to 3.85% p.a. (+0.44 points over previous year). As recently as 2013 this minimum expectation amounted to 4.50%, but since then had continually decreased through to 2019 in the wake of the general yield compression in the low interest rate environment.
The investors were also asked how in their opinion the implementation of ESG measures at property level affected the return. In terms of the value of a property the general opinion was clear: 79.0% assume ESG measures have a positive effect on the market value, while a mere 10.5% expect no impact and the same proportion expect a negative impact. When it comes to the cash flow of a property the results differ: in each case 42.2% expect a positive or a negative effect, respectively, whereas 15.8% do not envisage any consequences for the cash flow return. In the previous year investors had been considerably more sceptical against the background of much lower energy prices, with 53.3% expecting negative repercussions for the cash flow, while only 13.3% had positive expectations.
Nine out of ten investors intend to maintain or expand their real estate allocation
In the current macroeconomic situation the real estate asset class is proving to be extremely popular. Thus the protection against inflation offered by property is “explicitly” appreciated by 31.6% of the respondents and “to some extent” by a further 63.2%. To summarise, therefore, this is a clear majority of just less than 95%, compared to a mere 5.3% of investors whose response was “I don’t know”. In this context there was a similarly clear result when asked about plans for investors’ own real estate allocation in the coming twelve months. Only 10.5% of investors intend to scale back their real estate exposure, whereas 31.6% – nearly one third therefore – would like to increase their allocation. A further 57.9% do not plan to make any change. On average the surveyed investors aspire to a real estate quota of 28.2%.
“This robust demand for real estate investments ties in with what our clients report to us in our daily dealings with one another. Although the level of transactions has temporarily weakened in the face of a shift in monetary policy, we expect to see structures both in Luxembourg and in Germany picking up again in the near future,” says Vespermann.