Ernst & Young
Trendbarometer for Real Estate Investments
After several years of threatening to do so, it now really appears as if German insurance companies have put their money where their mouths are and have noticeably increased the allocation to real estate in their asset portfolios since the beginning of 2012. Over the period the average share of real estate has risen from 6.3% to 7.0%, primarily due to investment via the indirect or funds route, according to the latest (6th) Trendbarometer for Real Estate Investments published by Ernst & Young.
If the surveyed insurance companies carry through on their stated intentions, that proportion is set to rise to 7.6% by the end of 2013, with the favoured destinations for all this largesse being Germany and - perhaps a little surprisingly – North America. (Insurance companies are allowed by law to allocate up to 25% of their assets to real estate, so theoretically there is plenty of upward scope).
First, some figures. German insurers currently have about €90bn invested in real estate, while the entire amount invested by German insurers in all asset classes was about €1.3 trillion at the end of 2012. On average, every big German insurance company holds €2.6bn of real estate assets, of which €1.8bn are held directly and €0.8bn are held indirectly, according to the Ernst & Young Trendbarometer.
The study found that company board members surveyed claimed yield expectations of between 4.9% (for direct) and 5.5% (for indirect), although Dietmar Fischer, partner at Ernst & Young in Germany conceded at a recent press briefing in Frankfurt that these figures were at the ‘optimistic’ end (i.e. rarely achieved…).
Still at top of the preferred shopping list for insurers are (German) retail, offices and then residential, while offices is the category most would consider selling. The preferred category in all segments is – inevitably – core. However, the lack of core product and the need for higher returns means they are forced to move up the risk curve. Some 77% of those surveyed said they are planning to invest in core-plus, up from 65% in 2012, and 45% in value-add, up from 35%.
Respondents said that inflation was not a core issue for them (not one of their top five concerns). “Insurers are not worried about it any more, in stark contrast to private wealth investors, for which inflation is still the main driver for real estate investments,” said Fischer.
German insurers are particularly focused on direct investments and open-ended Spezialfonds and more are looking at developments and international open-ended funds again. In terms of regions, Germany still remains top of the charts, with 91% planning investment in their home market, followed by Europe ex-Germany at 57%, down from 70%. North America is named by 52% of respondees, up from 20% last year, with most believing that the US has now put the worst behind it.