Rental cap to make residential less attractive for insurers - survey

The coming Mietpreisbremse, or rental cap, is likely to make investment in German residential a much less attractive proposition for insurance companies, although real estate as an asset class remains highly rated, according the annual trend barometer published by consultant EY (formerly Ernst and Young). So far, however, it has not stopped insurers increasing their allocation to the sector, who are reconciled to an overall level of yield lower than in previous years.

EY surveyed 30 insurance companies for its 2013 study – a representative cross-section, it says. If last year 74% said they would be buying residential, this year the number is 59%. According to EY partner Dietmar Fischer, this is likely to have to do with the Mietpreisbremse, where in another part of the survey all but 18% said they expected the measure to have a negative effect on the attractiveness of the sector.

Real estate as a whole is actually gaining in importance for insurers, as they struggle to match their assets with their long-term liabilities. The surveyed insurers held an average of €2.5bn in real estate, with the proportion to total assets being 7.3% at the beginning of 2014, up from 7.0% in 2013, and 6.3% in 2011. Directly-held property rose this year by 0.5%, while indirectly-held property fell – very probably in sync with the out-of-favour open-ended funds.

The insurers are now striving to raise their property quota to 7.7%, plan average new investments of €264m and mean sales of €177m. Yield expectations have also fallen; expected yield on directly-held assets is 4.4%, as against 5.2% two years ago. On indirect investments, expectations have fallen from 5.8% in 2012 to 5.0% now.

Retail remains the favourite asset category, with 81% of respondents expressing a preference for the sector. This year only 63% plan investment in offices, down sharply from 78% last year. 48% plan investments in logistics, while the big winners are elderly and care homes, where the number of insurers planning to invest has shot up from 4% to 15% over the last year.

Not surprisingly ‘core’ properties are targeted by 92% of respondents, with interest in other risk categories actually falling – in the case of opportunistic, from 18% to a mere 4%. But 96% of respondents said that B-cities would see much higher demand for top assets given the shortage of properties available in the biggest cities.

Other interesting results: More than half the respondents (57%) said they planned to get more involved in debt finance. Only 21% expressed any interest in investing in listed property companies, and no more than 11% said they would be interested in paying a premium for any form of sustainability certification. Investing in the US has become less popular, with only a third expressing interest in investing there. On the issue of whether there is a property bubble in Germany, opinions were divided. 36% said there is, 43% said there isn’t, and 21% didn’t know.

Meanwhile, the word from Berlin is that the legislation surrounding the impending introduction of the Mietpreisbremse is causing more and more divisions among the coalition partners charged with bringing the new measure into law.

The justice minister in Berlin, Heiko Maas from the SPD party, is facing a barrage of criticism from even those federal states ruled by his party brethren, who see the legislation as it stands as far from enforceable. A key sticking point seems to be the inclusion of the five-year limitation on the measure, seen even by politicians of the left as important in order to ensure that sufficient forward planning for new construction takes place to meet demand, independent of short-term market bottlenecks.

Coalition partners in Angela Merkel’s party the CDU are pressing the SPD to ensure clarity on three key issues: first, the measure must be limited to a period of five years; second, the individual Länder must furnish proof of a serious housing shortage in the specific areas and neighbourhoods which will be designated as subject to the new law; and thirdly, the draft legislation must detail specifically how a ‘rent table’ in the affected areas is to be calculated for the purposes of establishing a ‘fair rent’. The Green Party is also contributing to a further muddying of the waters, by accusing the CDU of deliberately holding up negotiations on the measure and by increasing their demands for a more draconian law, including extending the period of validity to a full ten years.

Doubtless the fine print will be sorted out in due course, but it’s now clear that the Mietpreisbremse will NOT, as originally thought, be coming into effect this year – but in summer 2015 at the earliest.