Frankfurt am Main, October 7 2019
Institutional investors continue to focus 54 percent of their investments (previous year: 70.2 percent) on Germany. Demand for the rest of Europe was slightly up on the previous year at 31 percent (previous year: 28.2 percent). This contrasts with demand for investments in North America which is growing again, with 4 percent of respondents planning to invest in this region in the future (previous year: 0.8 percent). A similar situation can be found in the Asia/Pacific region where the share is rising to 9 percent (previous year: 0.8 percent). In the previous two years, real estate investors showed no interest in investing in growth markets (such as BRICS), while in 2019 the rate for at least for 1 percent of real estate investors increased.
In response to the steady rise in prices on the German real estate market, respondents are increasingly viewing the current price level as unacceptable, especially in core locations. 29.4 percent of respondents agreed with this assessment, a rate that is almost three times higher than in the previous year (8.2 percent). In contrast, 76.5 percent of respondents consider European real estate prices to be over-priced but still acceptable (previous year: 70 percent). 70.6 percent of respondents also took this view for real estate from the rest of the world. Investors throughout Europe no longer see opportunities to buy at low prices.
As in the previous year, approx. one in two investors (53 percent) plans to invest in office real estate (previous year: 52.3 percent). This compares with investor interest in retail/ shopping centers, logistics properties and hotels which continues to decline. At 8 percent, this is the lowest reading for retail properties since the survey began and contrasts with the 12.3 percent recorded in the previous year. Interest in the hotel sector has declined further to 6 percent (previous year 7.7 percent). Residential real estate is benefiting from this surge in demand, with almost one in four new investments (23 percent) being made in residential real estate (previous year: 14.1 percent).
Interest in investments in niche segments, such as medical centers, industry, etc., remains relatively slight compared with previous years – only 2 percent of those surveyed indicated plans to invest here in the future (previous year: 2.7 percent). "Niche investments are currently the subject of much discussion in the sector, thus suggesting a possible reflection in institutional investors’ portfolios. But the results of our survey show this segment to have little more than a niche status. Most new investments continue to flow into office and residential real estate, the classic use categories," explains Stefan Rockel, Managing Director of Universal-Investment.
As regards the latest use categories, investors are showing brisk interest in micro living, properties from the healthcare sector and public-sector buildings, such as nursery schools, public authorities and schools, closely followed by the corporate real estate segment. Interestingly, the use categories currently attracting much public attention, such as co-living and co-working, play a subordinate role.
A sizable 70.6 percent of respondents see a risk of a real estate bubble forming on certain European markets. 23.5 percent also clearly see this risk irrespective of the location. Only 5.9 percent have no fears of real estate markets overheating.
Nearly 90 percent of respondents expect an initial net return on new investments in real estate in prime locations in Germany's top 7 cities of less than 3.5 percent, with more than 40 percent of these expecting less than 3 percent. Until now, the current distribution yield had been the key performance parameter for two-thirds to three-quarters of investors surveyed. Only 47.1 percent still view this parameter as the main return indicator (previous year: 72.7 percent). The expected return on current cash flow has fallen for another year in succession and now lies at 3.41 percent (previous year: 3.96 percent). In contrast, the total return has grown noticeably in importance as performance indicator this year, reaching 41.1 percent among respondents in 2019 compared with 9.1 in the previous year. "With the current return on a property continuing to decelerate, investors are evidently gearing their focus more to the future and, based on a longer-term investment horizon, are increasingly relying on their properties appreciating in value", explains Rockel.
As regards the question of risk distribution, all respondents rely on Core+ followed by Core (70.8 percent). "Due to the yield squeeze on real estate markets, returns on top properties in prime locations are evidently no longer enough," says Rockel. "We believe this to be a reason why institutional investors are giving preference to Core+," Rockel continues. In the meantime, up to 58.8 percent of respondents are also interested in value-add properties which played practically no role at all in the previous year.
The previous favorite among institutional investors, the open-end real estate special fund under German law, is increasingly facing competition from vehicles based on Luxembourg law, such as SCS and SCSp (29.4 percent each). Compared with 72.7 percent of last year’s respondents planning to use a master KVG for new investments in the next twelve months, the share has now climbed again in 2019 to 76.9 percent. Of particular importance for institutional investors making new real estate fund investments is the desire for manage-to-core competence (62.9 percent). An impressive one in two respondents attach significance to a performance-related remuneration for the fund companies or to the option of being able to change the asset manager (e.g. via master fund vehicles).
Demand for residential still strong, while retail continues to ebb
70.6 percent see clear danger of bubble forming on certain markets
Growing interest in overseas real estate
76.5 percent plan to use a service KVG for new investments in funds