North America replaces Europe as most popular investment destination
By Sara Seddon Kilbinger, Senior Reporter
US more enticing to investors against backdrop of German economic woes
North America has replaced Europe as the most popular investment destination, according to EY Real Estate’s ‘Trendbarometer Real Estate Investments of the Insurance Industry’ survey, which was published this week.
Germany appears less attractive as an investment location, according to 95% of respondents due to its dependence on energy imports from Russia.
“Insurance companies are currently taking a wait-and-see approach to the real estate market,” said Jan Ohligs, partner at EY Real Estate and author of the study. “Although they are not completely questioning their investment strategy, patience is the order of the day in the current volatile environment between inflation, rising interest rates and the war in Ukraine. With sustainable transformation, a challenge as urgent as it is long-term is moving high up the agenda and causing a realignment of the insurance industry's investment strategies.”
Subsequently, insurance companies are acting more hesitantly, although half of the respondents said that they still plan to boost their exposure to real estate. Nonetheless, this represents a decline from the 66% who wanted to grow their real estate portfolios last year and 5% said they want to cut their exposure to the asset class.
At the lively 13th annual gathering of the USA-focused real estate symposium, hosted jointly in Frankfurt by lawyers Mayer Brown and the Urban Land Institute in early June, there were several indications from panel speakers and members of the audience that several of Germany's largest institutional investors are looking to increase their allocation to the North American market.
Commerz Real opens US office
Other German investors are also wising up to the importance of the US real estate market. Earlier this week, Commerz Real announced that it has opened an office in the US for the first time. “The United States are an extremely exciting market, offering attractive opportunities in the gateway cities above all,” said Henning Koch, CEO of Commerz Real, the real estate arm of Commerzbank, which has built up a portfolio of 12 assets in the US since 2004 via its open-ended real estate fund Hausinvest. The properties have a combined value of around $3.2 billion. The portfolio comprises six offices, four hotels and two shopping centres. The most recent acquisition was the office property “1900 N Street” in Washington, D.C. last month.
In May, Bayerische Versorgungskammer (BVK), Germany's largest public occupational pension fund, teamed up with Goldman Sachs Vintage Funds, a subsidiary of Goldman Sachs Asset Management, to manage a €300 million global secondaries real estate fund.
The fund will invest in both traditional real estate limited partnership interests as well as more complex structured and non-traditional secondary transactions around the world. Universal Investment Luxembourg will administer the BVK structure through which the Munich-headquartered BVK made its commitment to the fund.
Sustainability recognized as a value driver in the transaction market
Around 95% of those surveyed by EY Real Estate already consider climate risks and transitory risks in their investment strategies, with 90% saying that sustainability has a positive impact on resale value in addition to the environmental effects of lower emissions. However, more than half of respondents – or 55% - are not fully aware of the financing gaps that will be created by the necessary energy retrofits.
“Sustainability and, in particular, emissions optimization of real estate portfolios, are becoming an economic factor, not least due to stricter regulation,” said Ohligs. “A higher resale value also seems realistic - currently, however, the financing of the necessary measures is pending. A purely cash-flow-based approach might turn out to be too optimistic if we include the development of construction and material costs in the calculation.”
Risk appetite on the up
Interestingly, investor appetite for risk is soaring, with interest in opportunistic assets leaping to 40% this year, compared to just 18% last year, according to the survey. Nonetheless, at 70% and 85% respectively, core and core plus assets remain investor favourites. Insurers’ expected returns remain stable with minimal discounts (4.5% for direct investments and 5.5% for indirect investments in 2022, versus 4.7% and 5.6% in 2021).
“Insurers have to meet their return expectations despite tight product supply and corresponding pressure, and they can't lower them at will,” Ohligs said. “In addition, quite a few properties that were previously classified as 'core' now fall into a riskier category due to new climate change requirements.”
Residential leads the pack
Residential real estate, which was also top dog last year, remains the focus for 95% of respondents. Logistics and infrastructure also remain popular, at 75% and 63%, respectively. The office sector is gaining ground, at 84%, up from 79% last year. Healthcare, for its part, is losing its lustre, down at 42% from 46% last year. The volume of healthcare deals in the first half of 2022 fell by 20% as current conditions continue to put a dampener on market sentiment. Retail properties are continuing on their downward slide, enticing just 20% of investors, broadly half of the 37% last year. Hotels are faring even worse, whetting the appetite of just 5% of investors compared to 14% in 2021.