German real estate is expensive for institutional investors

The German real estate market has become expensive for institutional investors, according to the fourth annual survey by Frankfurt-based investment company Universal-Investment.

Despite Germany’s reputation as a safe haven, 37% of respondents said that real estate prices are now too high and almost 50% said that prices are too steep but still ‘marginally acceptable’. As a result, investors surveyed only intend to commit 45% of their investment capital to Germany this year (down from 67.5% last year). Investment elsewhere in Europe remains broadly unchanged at 25% (22.5% in 2016).

The big winner this year is North America, with respondents saying that they intend to commit 19% of their capital there, up from a paltry 5.7% last year. Interest in Asia also rose slightly by 1.8% to 8%.

‘This trend is commensurate with the analyses of the real estate portfolios on our platform, with the share of North American real estate having already risen in the past twelve months by one third’, said Alexander Tannenbaum, managing director of real estate at Universal-Investment. Interestingly, he said that Trump is not having any impact on the real estate market in the US because ‘investors have become used to volatility in the world’.

Overall, there were few quibbles about pricing in Europe, with just 1% of respondents saying that prices are too high. Outside Europe, 12.5% of respondents found prices to be ‘inappropriately high’.

According to the survey, investors do not plan to significantly increase their investment in offices. The share of respondents keen to make new investments in this segment remains broadly unchanged at 37%. Retail, however, is gaining ground, with respondents investing 25% in the sector, up from 21% last year. It is a similar story with logistics, with investment up 4% to 12%. However, investment in the residential sector has cooled off, at just 19%, almost half what it was a year ago.

‘Residential properties in Germany have become very expensive,’ Tannenbaum said. ‘To get a good return, you have to look very carefully at what you invest in. International interest has pushed prices up.’

Interestingly, a whopping 75% of respondents want to invest in real estate via master KVGs within the next 12 months, up from just 36% last year. In recent years, there has been a notable shift towards master KVGs with a split of administration and asset management, according to Tannenbaum. And when it comes to securities funds, more than 70% of institutional funds are already being managed via master KVGs, he said.

‘The greater flexibility offered by master KVGs for selecting the best asset manager and the enhanced transparency compared with solutions from one source are crucial for investors' choice of master KVGs,’ he said.

Cash flow continues to be key, according to 62.5% of investors surveyed, albeit it down from 82% last year. However, the internal rate of return (IRR) has become more important, with 37.5% of respondents focusing on it, more than double the 18.2% recorded last year. The respondents to the survey have been winding down their cash flow expectations and now expect a minimum return of 4.1% (previous year: 4.2%).

Indirect investment is also becoming more popular, with 87% of investment expected to be made via funds in the next 12 months. In particular, Germany’s ‘Spezial-AIF’ vehicles are extremely popular, with the majority of all new investments expected to flow into these real estate special funds. Unsurprisingly, direct investment has fallen to 13%.

‘Indirect investment vehicles are becoming more and more popular. This is also reflected in the demand in our own company. The fact that real estate special funds continue to play such a key role in investment vehicles is interesting,’ Tannenbaum said.

Institutional investors managing assets totaling around €50b took part in the survey.