Germany leads investment pack

Investment in Germany has rocketed this year, with 70.2% of institutional investors acquiring real estate assets there, up from 46.8% last year, according to fund manager Universal-Investment’s sixth Investor Survey, published this month.

‘The focus on Germany and Europe also matches the current holdings on our platform and highlights the concentration on established markets,’ said Stefan Rockel, managing director of Universal-Investment.

The deal volume in the first nine months climbed to more than €56b, an increase of 12% y-on-y, according to CBRE. Of this, €41.7b was channeled into commercial real estate, with an additional €14.5b making its way into the residential sector. Yields remain under slight pressure, with prime yields in the ‘Big 7’ falling to 3.21%.

‘Investor demand, from both domestic and international investors, is driving momentum in the real estate investment market,’ said Fabian Klein, head of investment at CBRE Germany. ‘This is well illustrated by the transactions involving the three tower blocks of Omniturm, Pollux and Gardentower in Frankfurt that changed hands within a few days in September. With the sale of several large portfolios, such as the Century Portfolio, the residential market also displayed a great deal of activity in the third quarter. The only constraint on the excellent performance of the German real estate investment market ... is that supply cannot keep up with demand.’

Europe remains strong as interest in US nosedives

Investment in the rest of Europe remained virtually unchanged at 28.2%, according to the survey. Interestingly, interest in the US has nosedived, with less than 1% of investors intending to place capital there, down from 18.9% in 2017, citing the market as being overpriced. Interest in the Asia Pacific region is also down, with just 0.8% of investors looking for opportunities in the region, down from 3.5% in 2017. Real estate investors are also still showing reluctance to invest in less established markets, such as BRICS.

Prices increasingly viewed as too high globally

Real estate prices are increasingly seen as exceeding acceptable levels, according to the survey. Around 70% of investors surveyed view European real estate prices as too high, albeit still acceptable, up from 50% last year. And 90% of investors rate German real estate as too expensive, yet acceptable, in line with 2017. Over in the US, though, it is a different story, with 66.5% of investors deeming prices unacceptable, up from just 25% a year ago.

‘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 said. Current political developments are also cited as the reason for the declining interest in both North America and the UK.

Offices continue to trump retail

Offices continue to be the biggest draw, with 52.3% of investors looking to invest in the sector, up from 30.4% last year, according to Univeral-Investment. Indeed, they also accounted for almost 36% of the deal volume in the first nine months, according to CBRE. The ‘Big 7’ comprised 53% of the total, or around €29.6b, an increase of 21% y-on-y, reflecting strong investor interest in core properties.

Interest in residential and logistics remains virtually unchanged at 14.1%, according to Universal-Investment. Retail continues to lag behind, mirroring the struggle that many retailers are facing on the high street, with just 12.3% of investors expressing interest, down from 21% last year. Interest in hotels has also waned, at just 7.7%, down from 14.5% last year, due to investor concerns that there could be a bubble in the sector within the next 12 months. By way of comparison, 80% of investors see no risk of a bubble in the office and logistics space.

Niche segments appear to have had their moment, too, at least for now. ‘This explains why there is currently renewed demand for classic segments such as the office sector instead of investing in hotels or retail,’ Rockel added.

Return on cash flow expectations shrink

The expected return on current cash flow continues to shrink and now stands at 3.96%, down from 4% last year. According to the survey, the majority of investors are banking on a total return of around 5.25%.

Almost 70% of those surveyed rely on core assets, with an additional 27.1% on core plus. Just 3.1% of investors are targeting value add.

KAGBs flagged as favourite investment vehicle

Everyone surveyedflagged open-ended special property funds under German law (KAGB) as their favourite investment vehicle, followed by open-ended property funds under Luxembourg law (63%) and Luxembourg SCS and SCSp fund regimes (33.3%).

Almost 67% of respondents have already invested in German real estate special funds and9.7% in their Luxembourg-based counterparts. REITs account for another 11.1%, with 22.2% invested in KAGB-Investment-KGs.

Last year, around 50% of investors intended to use a Master KVG for new investment in the next twelve months; this figure has risen to 72.7% in 2018. ‘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,’ Rockel said. Institutional investors with total assets of around €48.8b and real estate equity of around €4.45 b took part in the survey. Universal-Investment manages around €400b of assets, of which €321b are in its own vehicles. (ssk)