Investors have residential properties on the top of their wish list. Photo: / Jeff Hu

Real Estate Survey: Focus on Germany and North America

Author: Alexander Tannenbaum

Institutional investors’ investment focus is changing, driven by financial crises and low interest rates. This also impacts the real estate investment landscape. To shed light on these trends, Universal-Investment has conducted a survey on the investment behaviour of institutional investors. Institutional investors with cumulative assets under management of more than EUR 100 billion took part in the survey that was completed in September 2015. The real estate capital held by the respondents amounts to about EUR 8 billion. As such, the survey covers nearly one-fifth of the total market for real estate special funds. The survey results reaffirm several existing trends and market developments but also include a number of surprising findings with respect to investors’ preferred investment vehicles.

Alexander Tannenbaum, Managing Director, Universal-Investment Photo: Universal-Investment

The survey indicates that indirect real estate investments are becoming industry standard. Up to now, around 47.5 percent of real estate investments were invested in direct investment portfolios and about 52.5 percent through funds. In future, when making new investments, the investors surveyed plan to put markedly more than 60 percent into indirect investment vehicles. This reinforces the trend towards indirect real estate investments seen in the previous years because this share still stood at just under 60 percent in 2014. According to the current survey, 18.2 percent of new investments are set to flow into open-ended real estate special funds (previous year: 30 percent) under German law (Special AIFs pursuant to the German Investment Code (KAGB)) and 27.3 percent into SCS and SCSp (previous year: 10 percent), the Luxembourg counterparts of the German Investment-KG investment vehicle. Direct investments in real estate are still set to account for just over one-third of new investments (previous year: 40 percent).

High estimation for Luxemburg vehicles

This shows that the trend towards indirect types of investments continues, with the focus in this segment clearly on regulated investment vehicles. The perennial favourite of open-ended real estate special funds continues to be in high demand. However, a new focus this year is the high estimation for Luxembourg vehicles like the SCS. In contrast, the young German version of this form of investment, the Investment-KG, still tends to play a subordinate role in institutional investors’ new investments.

Source: Universal-Investment

The size of investors’ current and future real estate allocation remains a key question, as it is the starting point for all other activities in the real estate investment segment. The proportion of survey participants’ investments going into real estate currently already stands at about 8 percent and is set to continue rising to above 12 percent. This reflects the relatively high affinity to real estate of respondents to this survey compared with other market studies. Interestingly, institutional investors have been using the ongoing low interest rate phase to boost their real estate allocations for some time now.

Investor focus shifts to favour North America and Germany

Regional investor behaviour is subject to ongoing changes in line with economic cycles and other market factors. Currently, German real estate holdings account for 64 percent (previous year: 72 percent) of respondents’ real estate allocations, highlighting the persistently strong home bias of German investors. Again, the outlook here is interesting. Investors want to raise their allocations in North America and Germany in particular. The rest of Europe is more interesting as a supplement and the surveyed investors express somewhat greater reticence with regard to Asian markets again, although Tokyo, Singapore & Co. continue to attract investor demand.

Source: Universal-Investment

There is a particular focus on residential properties in the planned new investments. Their share is set to double from the current holdings of 18.5 percent to a planned share of 37.9 percent. In the previous year, current holdings were still only at 19 percent and were set to be increased moderately to 21 percent. At the same time, office properties are losing their traditional lead in new investments, ranking only in second place. It is not a new phenomenon that residential properties are seeing a renaissance as a form of investment. However, the extent of the planned restructuring in the portfolios to the detriment of office and retail properties is remarkable.

Residential properties head the wish list for new investments for the first time

Institutional real estate investors in Germany are responding ever faster to continuously changing market conditions. Among others, this is reflected in investors’ growing interest in residential real estate investments. According to the surveyed investors, demographic trends are one reason for the growing number of products in this market and, above all, the reasonable returns available in this segment, at least for the moment. The stronger focus on Europe and North America in new investments also underlines the increased response rate with which institutional portfolios are managed these days. 

Author: Alexander Tannenbaum
Date of issue: 11/25/2015