Internationalisation, residential focus and the further outsourcing of real estate holdings are the three major trends outlined in a new study on the real estate Spezialfonds market in Germany, discussed here by Barbara Ottawa.

Two years ago, summing up trends in real estate investments among German institutional investors in an interview with IPE Real Estate, Dirk Lepelmeier, head of the doctor's pension plan for Northrhine-Westphalia (NAEV), said: "Real estate Spezialfonds (ISFs) are replacing direct real estate holdings in the domestic German market and are in turn replaced by listed property, especially when it comes to foreign investments."

ISFs are property funds created for pension schemes, insurers and institutional investors. In exchange for investing at least €25m, an ISF gives considerable transparency, lower fees and good deal of control over the investment process. Traditionally investors such as BVV, VBL and NAEV have preferred them. To set up an ISF, the institutional investor can either work with external managers or pool money with others to acquire properties internationally.

The market crash drastically changed the investment environment and market expectations but basic trends remain the same, albeit slowed by the crisis. Today Lepelmeier says: "We are holding approximately 50% of our real estate portfolio directly and during the crisis we felt comfortable this way - but this does not change the long-term trend to more indirect investment. The trend to hold less real estate directly has been halted over the last year as investors are more aware of market volatilities created by valuation problems," he adds.

Michael Vogt, CEO of Patrizia KAG (Capital Investment Company) paints a different picture, saying the crisis "has not stopped the trend away from directly held real estate - quite on the contrary. Indirect investments help investors to diversify their portfolio better regionally and make optimum adjustments in terms of size of investment."

Herwig Kinzler, head of investment consulting at Mercer Germany, can see "no clear trend" from direct real estate to investments in German ISFs as the latter are often being used "as a counterweight to directly held real estate".

The latest study by the German Fund Management Association on ISFs shows an increase in the proportion of German retirement plans investing in this vehicle from 7.6% to 21.4% since 2004.

Currently 36 ISFs out of a total of 121 are managed for investors representing pension plans, writes Till Entzian, lawyer and author of the BVI-study on German real estate Spezialfonds, formerly known as the Kandlbinder report.

Another trend Entzian sees is the increasing internationalisation of portfolios. Last year, ISFs bought €1.9bn of foreign real estate, compared with €1.6bn in Germany
"In total the analysis still shows Germany as the main location for investments but the comparison over time confirms that the internationalisation of ISFs is growing," says Entzian.

For Lepelmeier internationalisation is a crucial factor in future real estate investments as he is convinced Europe will offer too little growth potential. "Our aim to internationalise the portfolio has not changed but it has lost some speed because of bad experiences during the crisis, which we have to evaluate in detail and learn from." He notes that for real estate investments to offer good returns there has to be growth, demographically. And while Asia - and to some extent the US - will show real growth, Europe will not.

Kinzler, who sees a general increase in real estate holdings among institutions, observes a stronger focus on Asia. "And with it a review of managers, for those who have so far managed a European mandate are not necessarily being given an Asian real estate portfolio," he says

Vogt would - quite literally - not go that far. "There is a lot of demand for Asian real estate but the question is whether it is the right time to invest in this area, judging by possible returns and the costs of such investments - it might be worth thinking about in 10 to 12 years."

Vogt is sceptical about the return/cost ratio of overseas investments as well as their calculability. The Patrizia KAG itself is currently only invested in Europe as the portfolio does not have an opportunistic focus, Vogt explains.

The real estate company - specialised in residential property - also confirmed a third trend Entzian outlined in the study: a stronger focus on residential investments. Looking at the sources for rental income 60% still comes from office space and only 3.2% from residential real estate (as of March 2009). Entzian believes the growth of home working will have an impact on the market.

While Vogt agrees on the trend he sees different motivations behind it. "Housing real estate has fewer risks than other property investments as housing is a basic need and people cannot and do not downsize their living space as easily as a company can downsize its office space during a crisis."

Unlike hotels or some commercial real estate, housing has no correlation to equity markets and offers a stable cash flow, which investors are looking for in the wake of the crisis, says Vogt.

Not all asset managers will be able to profit from the trend. Managing housing is quite different from any other property where you might have just one tenant with a 10-year contract, rather than hundreds of different parties moving in and out in the course of a year, Vogt says.

"The increased interest in housing real estate is a post-financial crisis effect because people are looking for the safest investment and housing will always remain in demand as it is also state subsidised in times of crisis," Lepelmeier points out.

In 2008 ISFs' assest under management grew by 8.5% to €23.1bn. From 1997-2007 annual growth was 25% on average.

Entzian, however, is convinced that ISFs will continue to grow as they offer indirect investment while still valuing property over a long-term horizon, thus minimising the asset class' correlation to equities.