Frankfurt am Main, October 14 2020

Medical centres preferred to hotels – Investor interest shifting to healthcare real estate

According to a Universal-Investment survey, institutional investors are continuing to invest in real estate with sustained intensity and are increasingly targeting the Asia-Pacific region for new investments. Luxembourg vehicles are also attracting greater interest. Real estate prices are viewed as high, yet still acceptable. Demand for offices has declined, and for hotels it has fallen away completely. The winners of the new status quo are residential and logistics properties. Mainly Germany-based institutional investors with total assets of around €225.7 billion and real estate portfolios of around €40.6 billion partook in the eighth Annual Survey.

Growing interest in Asia and North America

At 51.4 per cent (2019: 54.0 per cent), just over half of those surveyed cited Germany as the focus of their investments, and 28.8 per cent (2019: 31.0 per cent) quoted other European countries as attractive investment locations. The Asia-Pacific region continues to gain in significance and, with 10.9 per cent of respondents planning future investments in this market (2019: 9.0 per cent), it has successfully defended its lead over its North America counterpart which came in at 8.8 per cent (2019: 4.0 per cent).

Investors coming to terms with high price levels

The majority of those surveyed have come to terms with the price levels in the German and European real estate markets, with 85.7 per cent considering prices to be high but still acceptable. A similar view of prices prevails for non-European real estate markets, where as many as 92.9 per cent assess the current levels to be high but still acceptable. It is interesting to note the year-on-year drop in the proportion of those who no longer consider the price growth acceptable. Only 7.2 per cent now feel this way about Germany's real estate prices, compared with 29.4 per cent the previous year.

Slackening demand for offices and hotels, residential and logistics real estate gain in favour

Two thirds of respondents unchanged in their investment behaviour during the pandemic

Growing interest in Asia-Pacific

Sharp drop in demand for value-add investments

Sharp increase in demand for logistics and residential real estate

For the first time since the survey was initially conducted in 2013, residential real estate is now leading the list of planned new investments by a narrow margin. Around one in three respondents (34.1 per cent) intends to invest here (2019: 23.0 per cent). By contrast, the number of investors investing in office real estate (31.6 per cent) has fallen sharply (2019: 53.0 per cent). Logistics real estate ranked third at 17.4 per cent (2019: 8.0 per cent). Interest in retail properties remains low (8.6 per cent). As was expected, investors’ interest in hotels plummeted by almost half to 4.3 per cent compared to a year earlier (8.0 per cent).

Record demand for healthcare real estate

Alongside the general residential, office and retail property sectors, around 50 per cent of those surveyed expressed an interest in investing in newer types of healthcare real estate, closely followed by retirement homes at 42.9 per cent (2019: 17.7 per cent). This year's rankings are topped by public buildings at 57.1 per cent. Similarly to last year, the corporate real estate segment only plays a minor role (35.7 per cent).

When asked about the affect of the pandemic, investors were particularly pessimistic about the hotel segment, where all respondents fear a downturn. In terms of other negatively impacted utilisation types, hotels are followed by retail – in particular shopping malls and high streets – at 78.6 per cent, and co-working properties, viewed especially critically by 71.4 per cent. By contrast, investors see a boost for logistics real estate (85.7 per cent), followed by residential (42.9 per cent) and healthcare (35.7 per cent).

"Housing in general and healthcare real estate in particular is almost completely independent of economic cycles. Many market players, however, are finding it difficult to make an accurate estimate of future space requirements for office real estate," says Axel Vespermann, Managing Director of Universal-Investment and responsible for the real estate business segment. "This could well have an impact on future demand for office space, particularly for those companies who had positive experiences with working from home during the crisis," Vespermann continued.

Yield expectations remain stable – real estate ratios expected to rise further

With regard to the future course of the pandemic, the majority of those surveyed are nevertheless confident about expected yields. Over two thirds of the respondents (71.4 per cent) expect a net initial yield of between 3 and 3.5 per cent from new investments in real estate in prime locations in Germany's top seven cities. The remaining third of the respondents (28.9 per cent) expect a net initial yield of under 3 per cent (2019: 40 per cent). The expected yield on current cash flow has risen slightly and now stands at 3.58 per cent (2019: 3.41 per cent). Institutional investors intend to increase their real estate quotas slightly to 15.3 per cent (2019: 15.1 per cent). "With a very realistic view, institutional real estate investors have adjusted their yield expectations to the market environment. The further increase in real estate quotas reveals the lack of alternative investment opportunities in the security-oriented segment," explains Vespermann.

Continued focus on core+, declining interest in value-add

The majority of those surveyed continue to favour core+ properties (85.71 per cent), followed by core (57.14 per cent). Last year this preference was even clearer: without exception, all respondents put core+ in the top position, with 70.6 per cent of those surveyed declaring an interest in core properties in 2019. "Here, too, there is a definite crisis effect, as people are evidently expecting yields to fall in all risk classes. We can see this very clearly from the declining interest in value-add properties," says Vespermann.

Luxembourg vehicles closing the gap

Open-ended KAGB-based special real estate funds (KAGB is the German legal frame for investment funds) remain the most popular form of investment among German institutional investors, even though the figure has now fallen to 41.6 per cent (2019: 76.5 per cent). This contrasts with an increasing interest in almost all Luxembourg investment vehicles, with open-ended real estate special funds under Luxembourg law (25 per cent, 2019: 23.5 per cent), SCS/SCSp (33 per cent, 2019: 29.4 per cent) and RAIF (16.6 per cent, 2019: 0 per cent) growing in popularity.

Digital reports and local branches are key requirements

When asked about the key requirements for new real estate fund investments, almost three quarters of institutional investors stated that digital reporting is paramount (71.4 per cent) – a further sharp increase on the previous year (2019: 43.7 per cent). Demand for local branches in the target markets (57.1 per cent) also rose, compared with last year’s figure of just 37.5 per cent.

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Bernd Obergfell

Head of Communications

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bernd.obergfell@universal-investment.com

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