Instone boosts German residential pipeline to €4.5bn

German listed residential developer Instone Real Estate has signed to secure three further development projects in Germany, bringing its current pipeline of projects to about €4.5bn.

The latest projects should create 680 apartments in Potsdam, Hanover and Norderstedt (near Hamburg), and Instone said they should generate a combined sales volume of €265m.

Instone’s CEO Kruno Crepulja said, “In an exciting market environment, we succeeded in securing attractive new property developments in cities with positive demographic forecasts. The communicated target for the year 2018 of acquiring projects with a future sales volume of between €900m and €1bn was even exceeded.”

The company also inked a deal with acquisitive Bavarian pension fund giant BVK Bayerische Versorgungskammer to develop and sell an 18,000 sqm residential portfolio. The €72bn BVK is buying part of the “Stuttgart City Prag – Wohnen im Theaterviertel” project in Stuttgart. BVK said it will acquire 250 residential units, which includes 24 rent-controlled flats, for an undisclosed sum. Instone is planning to begin construction work on the project in spring of 2019 and to complete the project by 2022.

Christoph Geirhos, head of DACH real estate at BVK, said “Our residential portfolio is perfectly complemented by the 250 units at the Pragsattel site in Stuttgart. The strong housing demand in Stuttgart, the attractive location, the well-considered concept plus the trust-based and proven collaboration with Instone persuaded us to invest in this project early on.”

The Essen-based Instone, with 320 employees in eight offices across Germany, has been planning, building and marketing more than 1,000 residential units annually for owner-occupiers, for private buy-to-let, and for institutional investors, focusing on Germany's key metropolitan regions. Its project pipeline is currently valued at more than €4.5bn, with 45 development projects totaling nearly 9,000 planned residential units. It floated on the Frankfurt Stock Exchange in September last year.

Investors in non-listed sector still set to raise commitments through 2019

Despite the near-universal recognition that we are somewhere near the later end of the European real estate cycle, investors in non-listed real estate vehicles still seem set to hike their commitments to the sector, judging by the latest Investment Intentions Survey published earlier this month by INREV, ANREV (INREV’s sister organization working across Asia Pacific and North America, and PREA (the Pension Real Estate Association).

The key findings of the survey suggest that the gap between actual and target allocations to real estate is narrowing dramatically. Below are the main takeaways from the survey, which attracted a total of 154 respondents (144 institutional investors and 10 managers), 85 from Europe, 41 from North America and 28 from Asia Pacific. The largest two groups of investors were pension funds (79) and insurance companies (22).

Current average allocations to real estate for German investors rose from 14.0% to 14.2 % versus an uplift in target allocations from 15.1% to 15.8% in 2018. Overall, average allocations increased to 10.0% from 8.9% in 2018, against an increase in target allocations from 10.2% to 10.4%, significantly narrowing the gap between the two for the first time.

However, global institutional investors remain bullish about real estate indicating their intention to place a minimum of €72.4 billion of new capital into the asset class in 2019, continuing the recent trend of positive sentiment. Around €47.6 billion of this total is earmarked for non-listed vehicles, of which €7.2 billion is from German investors who plan to invest €5.3 billion in non-listed real estate funds, specifically.

Half of all investors will increase their allocations over the next two years, while only 9.3% expect to decrease their allocations, and 40.7% anticipate no change. Around 66.7% of German investors plan to increase their allocations while 33.3% say they will maintain current allocations, and none anticipate a decrease during this period.

Looking at the AUM-weighted results, 80.4% of all investors intend to increase allocations, indicating that larger investors will likely commit more than their smaller counterparts.

On a regional basis, the majority of European investors expect to increase their allocations, while most of those from Asia Pacific and North America expect no change. More North American investors will decrease their commitments, than their counterparts in other regions.

Diversification and enhanced returns remain the two main benefits attracting all investors to the asset class.

Risk off

For investors targeting Europe, there’s been a significant shift in favour of core, which rose from 31.8% to 39.1%, while opportunity dropped from 18.8% to 9.8%. More than half of German investors indicated that value added is their preferred investment style, at 57.1%, while the rest indicated they prefer core (42.9%).

In comparison, value added retains its status as the preferred investment style overall, with 51.1% of investors still attracted to the risk-adjusted return prospects it offers.

These results suggest investors may be taking a more risk-averse approach to their real estate investments, in preparation for the approaching late stage of the current cycle.

Brexit pinch

Overall, the UK, France and Germany remain the dominant European destinations for investors, though the order of priority has shifted since the last survey. This year Germany topped the list of preferred investment locations, selected by 66.7% of respondents, while the UK – number one in 2018 – is second at 64.6%, and France is third at 62.5%.

Funds of funds managers expressed a different order of preference placing the UK top, with the Netherlands second, followed by Spain. But while London / office is still at number three in the list of preferred city / sector combinations, European investors are less enthusiastic about the UK than their counterparts from North America and Asia Pacific.

It seems likely that the reality of Brexit has affected sentiment on the UK, and this year’s respondents are indicating that Germany will be one of the beneficiaries.

Alternative thinking

The office sector remains the most popular, selected by 93.8% of investors, followed by retail at 75.0%, residential at 70.8% and industrial at 60.4%.

Interestingly, investor interest in alternatives is also growing. At 33.3% and 31.3%, respectively, student accommodation and healthcare have become increasingly appealing. However, for these sectors to have a more meaningful impact on their traditional rivals, they will need to increase in scale and investors will need to acquire new skills to get comfortable with different operating models.

Vehicular access

Over 50% of investors already invested in non-listed real estate funds in Europe will increase their allocations to these vehicles in the coming 24 months. Commitments to JVs and club deals appear to be slowing down relative to previous years, though nearly 57% of international investors expect to increase their allocations.

This year and next, most investors will increase or maintain their commitments to directly held real estate and separate accounts, reflecting the ongoing desire for greater control. Separate accounts witnessed the strongest growing trend in commitments signalling the high demand for this route into real estate.

German investors indicate a strong preference for directly held real estate and separate accounts, with 60.0% and 66.7% respectively indicating intentions to increase their allocations to these investment routes over the next two years. Around 40.0% indicate that they will increase allocations to funds, while 40.0% also indicate that they will increase allocations to JVs and clubs.

Commenting on the survey results, Lonneke Löwik, INREV’s CEO, said: ‘With considerable amounts of cash continuing to flow into the market, investors are clearly focused on long-term investing. But, given that real estate cycles are typically 10 years one can say that we’re now in the late stage of the current cycle. The key questions raised are how are investors preparing themselves for an inevitable rise in interest rates, and how will this affect their investment decisions this year and their intentions to increase allocations beyond 2019?’