Low interest rates benefiting search for alternatives, real estate

Alternative investments are becoming more attractive to German institutional investors, with a third planning to invest more in real estate and infrastructure, according to a new survey by Frankfurt based Universal Investment.

The survey of 90 institutional investors with a combined €300 billion of assets under management, says low interest rates are increasingly impacting strategic asset allocation of pension funds, insurance companies and banks.

Two out of three German institutional investors have less than 3% allocated to alternative investments, but almost 70% plan to increase this, and 30% by more than three percentage points. About 29% plan to increase their allocation to private equity and loans. This is in contrast to the same survey last year, when only a fifth planned to do so.

German institutional investors are avoiding sovereign bonds and a fifth of those surveyed plan to increase their allocation to equities.

Meanwhile, two independent studies – one from Commerz Real and the other again from Universal Investment, point to how German institutional investors are shifting their focus in the search for yield on real estate into fund structure rather than opting to invest direct.

The Commerz Real study, based on responses from 110 institutional investors, indicates that over the next three years, the average real estate allocation in German institutional portfolios is poised to rise to 8.6%. The researchers comment, "Especially among companies, pension funds and Versorgungswerke, the future increase could be much stronger, which means, over the medium term, exposures of up to 18% could be achieved."

Meanwhile the Universal Investment study refers to a "paradigm shift" in the type of investments favoured by institutionals. 54% percent of the German institutional investors surveyed, with more than €44bn in assets under management, invest in real estate directly, while 46% invest via funds.  

However, for their new investments, more than 60% are considering fund solutions, 6% via the new Investment KG introduced in the AIFM Directive. Only around one-third of the new investments will be directly-held properties, Universal Investment said.

Not surprisingly, the Commerz Real study also highlights the increasing interest in the residential sector, which has risen from a 16% share of the market to 21% since 2010. Although commercial real estate remains dominant with 76% of the total volume (office 64% and retail 24%), residential has come increasingly into favour.

Universal Investment is responsible for the administration, in-sourcing and risk management of €170 billion of assets of German open-ended mutual funds and Spezialfonds.