Universal-Investment’s fifth annual survey of institutional investor behaviour points to increasing investor interest in other European markets as well as continued appetite for German real estate investments. While allocations to North America have remained stable, investors lose interest in Asia-Pacific. In terms of types of use, investments in office properties have weakened further, while hotels have attracted significant inflows. Investors’ cash flow yield expectations have declined further. Institutional investors with total assets under management of about €60.5 billion, including roughly €5.1 billion in real estate investments, participated in the survey. The survey results show that institutional investors plan to maintain their investments in German real estate. At 46.8 percent (previous year: 45.0 percent), their domestic allocations have remained largely unchanged while allocations to other European markets have risen to 30.8 percent (previous year: 25 percent). North America ranks at third place, largely unchanged at a high level of 18.9 percent (previous year: 19 percent). Asia-Pacific is the laggard with a share of just 3.5 percent of investors planning to invest in that region (previous year: 8.0 percent). Institutional real estate investors currently have no plans to invest in emerging markets like Brazil, Russia, India and China (previous year: 3.0 percent). “An analysis of real estate holdings on our platform also shows that institutional investors are seeking greater diversification within established markets,” says Alexander Tannenbaum, Managing Director in charge of the real estate business at Universal-Investment.
Planned hotel investments growing up strongly
As in the previous years, respondents plan to reduce their investments in office properties, with the expected share of office investments down 7 percentage points to 30.4 percent. The retail sector is also considered less attractive, declining slightly to 21 percent. The same applies to residential real estate. “We have witnessed a veritable renaissance of residential real estate in institutional fund portfolios for a number of years now. However, the high price levels reached in this segment now seem to be causing a certain stagnation of new investments,” Tannenbaum explains. Investments in residential properties are only expected to account for 14.5 percent of investor portfolios (previous year: 19 percent). Hotels are enjoying increasing popularity as a real estate investment. Planned allocations to this sector have nearly doubled to 14.5 percent while logistics allocations are expected to decline slightly to 10.9 percent. Niche segments such as health care properties and student apartments are expected to attract 5.2 percent of new investments. “Aside from rising prices in traditional real estate sectors – offices, retail and residential – diversification across sectors is a key aspect of investments in such products as hotels or health care properties,” Tannenbaum says.
Return expectations continue to decline
Investor expectations of current cash flow and annual distribution yields have continued to weaken and now stand at 4 percent (previous year: 4.13 percent). The surveyed investors calculate with a realised total return of 4.72 percent after gains from the sale of some or all properties. The annual total return calculated according to the BVI method is expected at 4.57 percent.
Institutional investors favour real estate special funds and master funds
Real estate special funds according to German investment law remain the undisputed vehicle of choice for institutional investors, with 62.5 percent of survey respondents planning to invest through these funds. As such, German real estate special funds continue to gain ground vis-à-vis their Luxembourg counterparts. Master funds are the biggest winners, with 37.5 percent of new investments expected to be channelled through these vehicles. “The strong trend towards Master-KVGs continues. As it is, the asset management for about one-quarter of special fund assets has been outsourced. The three largest managers of real estate funds for institutional investors also include two Master-KVGs,” Tannenbaum notes. Master-KVGs offer great potential in the real estate area. About 70 percent of securities special funds are currently managed based on the Master Fund principle. For the first time, the survey also asked investors about the type of investment with a view to potential joint investments with other institutional partners. However, about 70 percent of investors were found to prefer individual funds, with just 30 percent favouring pooled funds. The survey respondents were also asked about planned adjustments to their loan to value (LTV) ratios. About 70 percent project an unchanged LTV ratio, while 10 percent plan to increase it and 20 percent expect to reduce it.
Real estate allocations expected to continue to increase – type of reporting important
Rather unsurprisingly, the surveyed investors project a continued increase in real estate allocations from 13 to 13.2 percent. 70 percent of the capital earmarked for new investments is projected to be invested in funds, with about 30 percent likely to flow into direct real estate investments. For the first time, the survey also addressed institutional investors’ reporting preferences. More than anything, it found, respondents wish for at least some basic form of standardised reporting, quarterly IRR disclosures for sub-investments, for example in target funds, and detailed information on individual yield components.