Frankfurt / Main, October 8 2018

Investor Survey 2018 by Universal-Investment: Real estate investors no longer participating in price rallies

In Universal-Investment's sixth annual survey on the behaviour of institutional real estate investors, the majority continue to regard (the rest of) Europe and Germany as the main focus of their new investment. European real estate prices are seen as expensive but still acceptable. Many see the North American prices, however, as no longer acceptable. Interest in office real estate has grown, but is weakening in retail outlets and hotels. Almost three quarters intend to rely on a Master KVG for their new investment. Institutional investors with total assets of around EUR 48.8 billion and real estate equity of around EUR 4.45 billion took part in the survey.

Keyfacts

Institutional investors looking to Germany and Europe for new investment

Strong demand for office and residential space, waning interest in retail

Europe considered expensive yet still acceptable – but USA overpriced

72.7 per cent intending to use a Master KVG for new investment in funds

Germany and Europe still a prime focus

70.2 per cent of institutional investors are investing in Germany, up from the previous year's figure of 46.8 per cent. The rest of Europe remained virtually unchanged at 28.2 per cent (previous year: 30.8 per cent). Only 0.8 per cent (previous year: 18.9 per cent) have intentions of investing in North America in the future. There is a similar picture for the Asia/Pacific region: the share here fell to 0.8 per cent (previous year: 3.5 per cent). Real estate investors are still reluctant to invest in growth markets (e.g. BRICS). The focus on Germany and Europe also matches the current holdings on our platform and highlights the concentration on established markets," explained Stefan Rockel, Managing Director of Universal-Investment.

Price level exceeds acceptance limits

70 per cent of those surveyed rate Europe's property prices as high, yet still acceptable (previous year: 50 per cent). This figure rises to 90 per cent (as in the previous year) for German real estate. The situation is different in North America: 66.5 per cent (previous year: approx. 25 per cent) consider the prices unacceptable. "The reaction to the higher market prices in combination with the actual expectations on the development on yields and the economic situation shows that institutional investors are no longer participating in all price rallies and are taking a critical view of developments," Rockel continued. Current political developments are also cited as the reason for the declining interest in North America (33.3 per cent); the same applies for the British real estate market.

Office space in greater demand again – falling interest in retail investments

52.3 per cent of investors are looking to invest in office space (previous year: 30.4 per cent). Their interest in residential and logistics real estate remained virtually unchanged: 14.1 per cent (previous year: 14.5 per cent) of new investment is expected to be made in residential and 10.9 per cent in logistics real estate (unchanged from previous year). Only 12.3 per cent (previous year: 21 per cent) is to be invested in the retail market. The hotel sector also fell in the investors' favour, down to 7.7 per cent (previous year: 14.5 per cent). One of the reasons could be worries about a property bubble in this sector: 36.4 per cent are expecting to see a hotel property bubble in the next twelve months.

The share of both the retail and residential segments was 27.3 per cent. However, 80 per cent see no risk of a bubble in office and logistics real estate. Niche segments still enjoy little popularity with investors. The proportion of planned new developments fell from 8.7 to 2.7 per cent. "Next to the results of the survey, showing investors expectation of an increasing risk of a bubble especially in the hotel segments, we also see in practice a decreasing investments in this segment. This should also explain why there is currently renewed demand for classic segments such as the office sector instead of investing in hotels or retail," explained Rockel.

Yield expectations continue to decline – focus still on core

The expected return on current cash flow continues to decline and now stands at 3.96 per cent (previous year: 4 per cent). This is the main focus of returns for 72.7 per cent of the respondents. They are expecting a total return of 5.25 per cent (previous year: 4.72 per cent). The expected unrealised total return remained almost unchanged, averaging at 4.66 per cent. In the previous year, investors expected 4.57 per cent. With regard to risk diversification, 69.8 per cent rely on Core and 27.1 per cent on Core+. Value-added real estate, on the other hand, plays a negligible role (3.1 per cent).

German real estate special fund is favourite investment vehicle

With regard to new investments, all respondents declared an interest in the open-ended special property funds under German law (KAGB), followed by open-ended property funds under Luxembourg law (63 per cent) and the Luxembourg SCS and SCSp fund regimes (33.3 per cent). 66.8 per cent of the respondents have already invested in German real estate special funds and 9.7 per cent in its Luxembourg counterparts. The share for REITs is 11.1 per cent, with 22.2 per cent for KAGB-Investment-KGs.

Emphasis on good reporting and structuring capability of Master KVGs

Last year, around 50 per cent declared their intention to use a Master KVG for new investment in the coming twelve months; this figure rose to 72.7 per cent in 2018. All institutional investors value good reporting and the structuring capability of such service vehicles. "The Master KVG is a successful model, and the trend towards master funds has been ongoing for years now. This also explains our strong growth in this segment," explained Rockel. According to the latest BVI statistics, Universal-Investment is now one of the largest real estate fund manager for institutional investors in Germany.