New milestone as BVK lends €150m without banking partner

Germany's occupational pension funds have been stepping up ever more assertively to provide finance for real estate deals as part of their asset allocation strategies, which envision increased exposure to the real estaate sector over the long run. So far, however, they have always done so in partnership with banks or other financing institutions.

Now, for the first time, Bavaria's giant €62bn Bayerische Versorgungskammer (BVK) has made the step of issuing a loan directly to a real estate investor without the help of a consortium. The pension fund has made a loan of €150m to Gewofag, a housing association owned by the city of Munich. Gewofag is Munich's largest landlord, with 35,000 apartments under management.

A BVK spokesman said that the facility was granted as a general loan, and not specifically for any particular project. “Some of it will be used to refurbish properties in Gewofag’s portfolio and to purchase new assets,” he said.

According to André Heimrich, board member with responsibility for capital investments at BVK, "For us at BVK, investments offering good yields and our social responsibility for this sort of co-operation go hand in hand. We are glad to be able to contribute as a financing partner to help Gewofag create and maintain affordable housing in Munich." BVK itself owns and manages 6,500 apartments in Munich.

Despite strong yield compression in the sector, there appears to be no shortage of alternative financiers indicating their interest in increasing their exposure to financing arrangements similar to that of BVK.

An online survey carried out by Engel & Volkers Investment Consulting over the summer among 214 institutional investors in Germany underlines how market players are adjusting their strategies.

The survey showed that 53% of respondents plan to increase the residential quota in their overall real estate portfolios over the next twelve to eighteen months. More than 60% plan to invest up to €100m. Preferred locations are A- and B-cities with 35% respectively, while 23% want to invest in C-cities (i.e. those with under 100,000 inhabitants).

When asked what type of residential accomodation they wanted to invest in, 14% said they preferred the lower-price segment, 31% favoured the mid-price segment, while 14% opted for the top end of the range. 11% said their preferred sector was student accomodation, while 8% chose the health care and nursing home category.

When asked about yield expectations, respondents were almost unanimous in saying they were looking for between 3.5% and 5% for their indirect investments, which for 57% of respondents was the same expectation as for direct investment. The main difference here was that for direct investments, 14% of respondents respective said they would be satisfied with a return of less than 3% on the one hand, or between 5.5% and 7% on the other hand.

According to Kai Wolfram, CEO of Engel & Volkers Investment Consulting in Frankfurt, "Compared with the so-called risk-free investment such as in government bonds, residential property still offers attractive yields despite partly very steep price increases. Comparing both investments still shows up a gap of more than 300 basis points – where the long-term average difference is more like 100 basis points. Hence we still expect prices to continue to rise, while the downside risk is fairly well protected."

The survey makes for interesting reading, particularly regarding investors' views on the future development of the residential market.

Not surprisingly, investor expectations for rental rate increases are the highest in Germany biggest cities, the so-called A-cities. Investors expect renta increases of 3.4% a year, compared with 2.9% in B-cities and 1.6% in C-cities.

Purchase prices are expected to continue to rise in A-cities and B-cities (by 66% and 63% of respondents respectively) or remain stable (by 26% and 29% respectively). In C-cities only 24% believe prices will continue to rise, while 47% see prices remaining stable, and 19% expect prices to actually fall from current levels.

When asked about the Mietpreisbremse, or rental cap introduced this summer in Germany to impose limits of permissible rent increases, 70% or respondents said the measure would have no effect on their investment decisions. 13% said they planned to to invest less in residential property, while 11% said they would invest more.

According to Wolfram, "When you consider the expectations for rental increases in the A-, B-, and C-cities, then it's clear that many investors haven't fully priced in their permitted rental increases under the law. What seems to be frequently decisive is not the legally permitted situation, but local conditions prevailing on the relevant rental market." More significant for investor decisions is the future movement of interest rates, as 32% of respondents answered, followed by the 'sustainability' of the properties and local demographic trends.