Little interest in alternative investments by German institutionals

While there have been many far-reaching changes in the German real estate industry over the past ten years, in many respects behavioural patterns have not changed significantly when it comes to institutional investors' choice of investment strategy, to judge by the latest survey from Berlin-based RUECKERCONSULT GmbH.

The survey took soundings from about 100 institutional about their real estate strategies in advance of the annual Immobilien FondsForum in Königstein in the hills outside Frankfurt last week. Among the clear messages was that German institutions clearly prefer indirect investing in commercial real estate, rather taking a direct approach. Other notable findings were the low level of interest in alternative investments such as real estate bonds, convertible bonds or debt funds, the continuing focus on the country's major cities, particularly for office assets, and a growing interest in participating in development projects.

Thomas Rücker, managing director at Rueckerconsult, commented: “Real estate special funds are the number one investment vehicle, but German investors prefer to stick together. With the need for security remaining high, expected returns are low.”

Of those surveyed, 28% of respondents said they are planning to increase their share on indirect holdings, while only 19% are looking to increase their share of direct investments. 26% of respondents are planning to invest exclusively in indirect investments, with the vehicle of choice being real estate special funds, or Spezialfonds.

Solidarity with other German co-investors: Most special fund investors want a minimum of two to ten co-investors, while the majority think between one and three is an ideal number. “They also have specific ideas about what type of co-investors they want”, explained Rücker. That’s why German investors like to stick together. 45 % of those surveyed could imagine investing with German pension funds, retirement funds and additional pension funds and 20 % with German insurance companies. “They were especially averse to non-German investors, particularly international private equity funds and international government funds”, added Rücker. 

Institutions “do not tend to stray from the beaten track”, despite the pressure to invest, according to the research. The survey found little interest in alternative investments, such as real estate bonds, convertible bonds or debt funds.

Only 14% said they would include bonds of real estate companies in their portfolio, while only 8% would be willing to buy convertible bonds of real estate companies.

Another clear result was respondents’ continued focus on major German cities – particularly for investment in the office sectors.

Most investors – around 74% of those surveyed – continue to focus on office and retail property. Around two-thirds of respondents target an average rental return of 4-5%, while only 7% are targeting returns above 6%.

Also noteworthy was an increased interest in investment in project developments, possibly due to the wider availability of finance. According to Rücker, “The higher funding for development projects also indicates a slightly greater willingness to take risks. 57 % would consider investing in office, retail or residential development projects”. Some 60 % of insurance companies indicated a willingness to invest in development projects, while among German pension funds the figure is almost 80 %.