German insurers commit more to property, feel Asian competition

Although they have been threatening to do so for years, Germany's insurance companies have only recently been actively increasing the real estate quota in their overall asset holdings. Last year they collectively raised the quota to 9.3% from 7.3% in 2014, their highest-ever level, and should steadily increase the quota over the coming years, if their stated intentions are this time anything to go by.

This was the key take-home message at a press briefing in Frankfurt recently by EY Real Estate, presenting its latest barometer of 30 German insurers, each holding an average of €3.5bn in property investment and collectively covering about 80% of the market.

The key driver remains the low interest rate environment and the miserable returns available on ialternative investments, with 95% of respondents saying they have little alternative but to increase their property allocation. With yields having turned negative on traditional government bonds, the 80% allocation to fixed income securities and bonds is simply not providing enough return for the insurers to match their long-term liabilities, hence the need for more exposure to the real estate sector and infrastructural assets such as the electricity grid, wind-parks and airports, among others, which provide stable predictable returns.

The average proposed extra investment per insurer will be €417m this year in direct investment or indirectly via funds, up from last year's targeted figure of €298m. This would see the overall quota reach 9.8% by the end of this year, if actually carried out, or almost one in every ten euros invested.

According to Dietmar Fischer, Partner at EY and author of the report, the nearly 2% rise over the last year was the first really significant increase into the asset class for years.

Among favoured asset categories, office has overtaken retail with 75% of insurers planning to allocate to the ofice sector, up from 55% last year. Retail, the leading category for the last three years, fell to 65% from 80%, largely due to "lack of supply in the sector", said Fischer. The allocations to residential (at 65% of respondents) and logistics (at 40%) remained comparable to last year, while Fischer noted that it was surprising that investments into elderly-friendly, managed-care or nursing home assets were not more prominent in investor plans, at the same 10% as noted last year. "We do expect that this will pick up again later, but at the moment several investors are wary in the light of several large recent operator insolvencies."

The responding insurers declared a preference for direct investment, with 70% planning to invest direct. When investing indirectly, half of the insurers plan investments into open-ended Special Funds, 45% into closed-end funds and 45% into project developments – up from 20% in 2015. Investing in real estate debt funds was also given by 20% of respondents as a credible alternative.

“Insurers are increasingly willing to take on more risk, in the form of either project developments or core-plus and value-add assets,” said Fischer. “However, they are not ready to make compromises on location.” Only one-third will invest in B- and C-locations. While planned allocation to core (63%) and core-plus (74%) assets fell, value-add gained 14% to 47%.

However, in A-locations, German insurers are facing increased competition from Asian and Chinese state funds, and are having also to consider top locations in secondary cities as a result. "Asian and Chinese state funds are currently on a buying spree in Germany and have a lot of interest in German real estate portfolios," said Fischer.

As a consequence, 95% of respondents said they felt a noticeable squeeze-out effect from increased investment activity by foreign funds. This was pressuring returns and forcing insurers to look at riskier assets such as projects under development, which may carry higher risks to complete or rent, Fischer said.