German investors lose interest in Asia-Pac region

German institutional investors have lost interest in the Asia-Pac region, according to German fund manager Universal-Investment’s fifth annual survey published this month.

Just 3.5% of those surveyed said they plan to invest in the region, down from 8% last year. Other emerging markets have also fallen out of favour: none of the investors surveyed plan to invest in markets such as Brazil, Russia, India and China, down from 3% last year.

Interest in Germany has increased, albeit slightly. Almost 47% of investors said they plan to maintain their investment in German real estate, up from 45% last year. Allocations to other European markets have also increased to 30.8%, up from 25% last year. North America took third place, accounting for almost 19% of investment, in line with 2016.

‘Prices are up in the Asia-Pac region by 5% to 6%,’ Alexander Tannenbaum, managing director of real estate at Universal-Investment, told REFIRE. ‘In addition, international investors are also competing with J-REITS and hedging costs are really high right now. An analysis of real estate holdings on our platform shows that institutional investors are seeking greater diversification within established markets,’ he added.

Hotel investment on the up

Hotels are enjoying a renaissance, according to the survey, and planned allocations to this sector have nearly doubled to 14.5% while logistics allocations are expected to decline slightly to 10.9%. Niche segments such as health care properties and student apartments are expected to attract 5.2% of new investment.

‘Hotels offer a stable income and are often on long leases, which is attractive,’ Tannenbaum said. ‘The increased interest is also due to favourable cap rates compared to offices,’ he said.

Aside from rising prices in traditional real estate sectors – offices, retail and residential – diversification across sectors is a key aspect of investments in such products as hotels or health care properties, according to Tannenbaum.

Offices, however, have lost their shine. Once again, respondents said they plan to reduce their exposure to offices, taking the sector’s share to 30.4%, down 7% y-o-y. Retail is also down fractionally to 21%. Even residential investments, which are beloved of so many investors, have hit the skids slightly, with investment in the sector not expected to surpass 14.5%, down from 19% last year.

‘There is a lack of supply when it comes to residential assets,’ Tannenbaum said. ‘They’ve also become very expensive in Germany, which would explain why investment is down.’

Once again, investors are having to adjust their return expectations downwards. Investor expectations of current cash flow and annual distribution yields have continued to weaken and now stand at 4%, down from 4.13% last year. Investors put their total return after the sale of some properties at 4.72%. The annual total return calculated according to the BVI method is 4.57%.

Spezial and master funds attract most investment

Real estate spezial funds remain the undisputed vehicle of choice for institutional investors, with 62.5% of survey respondents planning to invest through these funds. As such, German real estate special funds continue to gain ground vis-à-vis their Luxembourg counterparts. Master funds are the biggest winners, with 37.5% of new investments expected to be channelled through these vehicles. ‘The strong trend towards Master-KVGs continues,’ said Tannenbaum. Around 70% of securities spezial funds are currently managed based on the Master Fund principle.

For the first time, the survey also asked investors about the type of investment with a view to potential joint investments with other institutional partners. Around 70% of investors said they preferred individual funds, with just 30% favouring pooled funds. In addition, around 70% of investors said they don’t plan to change their LTV ratio, whereas 10-% said they plan to increase it and 20% said they expect to increase it. Real estate allocations are expected to remain broadly unchanged at 13.2%, up from 13% last year.