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Barometer Trend
What is being financed? There is a slight shift towards niche products, in both project developments and existing properties, with core segments in office and residential declining somewhat. For existing properties, micro-apartments (up 1.4%) and hotel properties (up 1.3%) are in favor, while logistics is the strongest segment among project developments (up 1.6%), trends observable over the last several quarters.
#German insurance companies threatened last year to increase their allocation to real estate – and did indeed carry through on their plans, boosting their investment in the sector from 7.3% to 7.6%, according to a new study published by EY Real Estate.
The eighth annual edition of EY's Trend Barometer Real Estate Investments of Insurance Companies shows that the German insurance industry plans to up their allocation to as high as 8.2%, despite rising prices and heightened competition for the core properties that meet their risk profiles.
Last year's asset value rose by an average per insurer of €360m to €2.83bn among the biggest 30 German insurers – effectively the same group surveyed the previous year. This figure represents additional investment as well as upward valuations. Of this an average of €2bn was held directly, with €800m held indirectly.
The allocation to real estate within insurers’ portfolios should increase from the current 7.6% to 8.2 % by the end of 2015, measured at fair value, the survey suggested, with the split 5.8% for directly held properties and 2.4% for indirect investments.
According to Dietmar Fischer, a partner at EY Real Estate in Frankfurt, "German insurers clearly wish to expand their real estate portfolios, in particular in the European core real estate markets. For many insurers, real estate represents the premium asset class now, given the paucity of investment alternatives and the spreads above the no-risk return on government bonds. They want out of bonds, and into real estate, to be able to meet their long-term obligations."
With sovereign funds and big family offices now being practically charged to deposit their money with banks, Fischer said that EY was now seeing several clients happy to get a yield of 2.5%, which is closer to a real 3% when bank penalties are included.
Fischer commented that one thing that surprised him in this year's survey was that, in contrast to earlier years, insurers were not reacting to the increased competition with starkly lower yield expectations. They still expect a 4.3% yield on directly-held investment, barely 0.1% less than last year, whereby for indirect investment their yield expectations have actually risen by 0.1% to 5.1%.
They also seem to be holding the line in terms of risk categories, with Core (86%) and Core-Plus (71%) the most in demand, while interest in Value-Add has slid from 42% to 33%. Geographically Germany remains the most sought-after market, with only the most stable neighbouring European markets viewed as alternatives.
Among asset types, the retail sector comes out tops in 2015, with 80% of the insurers surveyed planning to invest this year retail. But but shifting changes across the sector means investors are being more selective, and 87% of respondents indicate that the selection of tenants is more important than ever.
Office property, long the leading asset type, has been overshadowed slightly for insurers by the inherent risk of lumpen risk and loss of tenants. Meanwhile, about 90% of survey participants expect speculative commercial development projects to increase.
"Property still enjoys very strong popularity among respondents,” said Fischer. “Insurers want to secure long-term investments and generate stable earnings. For them, capital preservation and hedging their guaranteed products are paramount. "
