The global financial crisis has changed the world – including real estate investment. Before Lehman Brothers collapsed in 2008, German investors were looking to maximise global diversification in terms of countries, segments and properties. "After the fall of Lehman Brothers, investors needed to bolster risk provisions: they took defensive positions and were on the lookout in particular for safe assets," explains Dr Thomas Beyerle, Head of Research at the real estate consultant and asset manager Catella Property Valuation.
If German investors did seek diversification within their real estate portfolio, they have tended to focus to date on Europe, but primarily Germany. "Until now, anyone with office properties in Germany who wanted to diversify has opted for residential properties or niche markets like co-working spaces, student accommodation or serviced apartments," according to Dr Beyerle, "where returns were slightly higher than the baseline rate of three to four percent."
However, there has not been enough property construction over recent years in Germany, which has created excess liquidity: investors have money to spend, but there is a shortage of investment properties. Excess liquidity is a challenge for investors and funds initiators alike. Fund initiators are having to up the pace of new product issues, because investors are queuing up to hand over their money. In Europe, including the German market, the supply of investment opportunities is not enough to satisfy demand.
One way that investors could resolve the deadlock is to look beyond the confines of Germany and Europe. Western Europe offers few benefits in terms of diversification, because the European markets are so much in sync that investment risk is almost identical whether you buy in Frankfurt am Main, Madrid or London – and prices are also comparable.
A lot of investors are worried by the price developments. "Every month, prices break through a ceiling somewhere in Europe," comments the real estate expert "especially in urban areas, where there is little new construction, but demand for residential and commercial property is high." Demand is likely to remain strong, which means that prices will keep climbing.
The prospect does not bode well for returns on real estate investment. Alternatives are available – for example, project development is a major value driver. "Investors can easily achieve returns in excess of five percent," Dr Beyerle explains. "But a lot of real estate special funds and investment companies tend to have a limited quota available for development, either because of risk aversion or regulatory constraints." However, real estate experts are aware of promising opportunities for diversification outside Europe. "German investors need to take a more global approach," Beyerle argues. Although there is still a lot of uneasiness around foreign risk, real estate investors and fund initiators can now hedge exposure through risk managers and expert opinions. Consequently the opportunities inherent in globalisation should begin to return to the spotlight. "Greater internationalisation may actually be essential to avoid the risk of regional clusters," says Beyerle.
Where can investors get decent returns nowadays? In Central and Eastern Europe, investors will find opportunities with returns of over five percent. However, many investors will be put off by the political risks. The same is true for the Russian and Turkish markets: although higher returns are available in both markets, investment is not really viable given the political situation.
Beyerle believes Asia is definitely the best place to leverage returns, "Especially the Chinese mainland, but also Malaysia and Australia." Investors looking to diversify cannot afford to ignore the US and Canada, while the Latin American market is also promising. Beyerle points out that returns in Mexico outperformed Frankfurt by 250 basis points. He concludes that "The real estate investment universe should not be confined to the area between southern Wuppertal and north of Paris."
The challenge with international real estate investment is that German investors have few opportunities to invest directly in far-flung markets. They do not have access to markets or any local knowledge, with language often proving an insuperable barrier. "One solution is a real estate master KVG, which separates the fund administration and asset management," comments Marcos J. Joos, Head of Real Estate Investment Management at Universal-Investment. "The master KVG system can readily incorporate external local managers around the world."
Using a real estate master KVG, investors can choose a real estate fund in Germany or Luxembourg with real estate managers who specialise in certain countries and/or asset classes. Real estate master KVGs provide support for investors when it comes to selecting and linking up with managers, structuring the fund and meeting regulatory requirements. In this way, expert knowledge is always available as and when necessary.
As well as offering greater transparency and flexibility, the master KVG format guarantees control and regulatory compliance. Investors can invest outside Germany without affecting their own balance sheet. At the same time, they enjoy the benefits of the modular master KVG product range, which encompasses everything from issue and fund structure to administration and reporting.
Global real estate managers and fund initiators take the same approach: by issuing funds through a real estate master KVG, they can offer German investors a familiar vehicle that meets all regulatory requirements, but do not need to create their own investment company. In this model, the real estate master KVG deals with all administrative duties, advisory services and structure, leaving the real estate managers free to focus on their core competences.
Marcos J. Joos explains how real estate master KVGs simplify internationalisation for investors and global real estate managers, "Particularly in Asian markets, especially China, German investors are confronted with a lot of regulatory challenges. What is more, transactions often involve large volumes, putting them out of the reach of individuals and creating an accumulation of risks. As a real estate master KVG, we work with local managers and can be included in club deals, where several investors club together to purchase real estate worth hundreds of millions of euros."
Growing numbers of investors are also using master KVGs for real estate. On the Universal-Investment platform, the volume of assets has tripled in three years to 20 billion euros as at June 2019, most of which are held in Asia and Europe. Within the real estate sector, Universal-Investment has issued 20-odd investment funds, 20 sub-funds and over 20 fund segments.
We have links to more than 35 asset managers around the world, which serves to demonstrate the growing importance of the international dimension and diversification for niche products. "Institutional investors have significantly increased their asset allocation for real estate investments," according to Joos. Master KVGs are one way of spreading global real estate exposure, drawing on specialist real estate knowledge in order to make the most of opportunities. "By using local managers around the world, they offer investors a wealth of investment opportunities."
Author: Dr Thomas Beyerle and Marcos J. Joos
Date of issue: 1/27/2020
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