Cash flow yield now top criterion among institutionals

The development of German Spezialfonds as an appropriate vehicle for institutional investment in real estate has been gathering pace since the dark days of the open-ended funds, when nearly a third of the German mutual funds industry was either temporarily or permanently closed to redemptions due to the seizing up of liquidity.

Seven years and a raft of government legislation later, German investors are increasingly warming to the Master KVG model, based on German law, which offers an alternative to the Luxembourg versions frequently favoured by Anglo-Saxon and non-German fund initiators.

The Frankfurt-based fund group Universal Investment has just completed its third annual survey on German institutional investor behaviour, and it casts some light on the sector's emerging preferences.

The survey was carried out at the end of 2015, with participants including instituional investors, pension funds and insurance companies with managed assets of more than €100bn, and real estate capital of those surveyed of more than €8bn, thus covering about 18% of the overall market for real estate special funds.

According to Alexander Tannenbaum, managing director for real estate at Universal Investment, "Today 70% of security investments of institutional investors are already managed via Master KVGs, based on the principle of separating asset management and administration. What's new, however, is that this trend is also catching on in the real estate investment area.”

64% of those surveyed rated the Master KVG positively, with 36% even planning to use a Master KVG within the next twelve months. "Investors particularly appreciate the higher transparency compared with solutions that offer everything from one source. The greater latitude for selecting the best partners also plays a role and weighs heavily in favour of the Master KVG,” Tannenbaum said.

This year's survey shows a marked focus on the cash flow return, by 82% of respondents, up from last year's 60%. The share of respondents focusing on IRR with a profitable exit has fallen sharply from 40% last year to 18% this year. Cash flow expectations are now for a moderate return of 4.2% rather than last year's 4.5%, which Tannenbaum calls "adjusting to the current market situation".

Indirect investment in real estate is the preferred path, with 63.6% opting for indirect rather than direct investment, up from 60% last year. 73% said they want to be closely involved in the investment decisions, with 27% saying they wanted to leave this to the asset manager or the KVG itself.

As to the vehicle itself, the open-ended Spezial-AIF according to KAGB (German Investment Law) has declined in popularity, with 18.2% opting for the vehicle (down from 30% the previous year). The Luxembourg versions – SCS and SCSp – had a leading 27.3% market share (up from 10% the previous year).

Tannenbaum concludes: "The trend towards indirect investment vehicles has strengthened. Time will tell whether the Luxembourg versions of the German Investment-KG continue to catch on among investors. At least the open-end German real estate special fund no longer appears to enjoy a unique position. Evidently investors are not only increasingly diversifying in terms of the real estate segments and geographical direction but also in terms of their choice of the real estate investment vehicle,”