German pension funds are “missing out” on higher returns by “virtually excluding” real estate stocks, according to Europe’s listed real estate association.

Philip Charls, CEO of the European Public Real Estate Association (EPRA), told delegates today at this year’s annual conference in Berlin that reforms were needed to allow capital to flow into the listed real estate sector.

Charls said “laws need to be changed” to encourage German institutional capital to invest. “We will continue to push for more German pension fund investment,” he said.

Alex Moss, CEO of Consilia Capital, said German pension funds and insurance companies could benefit from investing in real estate stocks.

Moss, a member of EPRA’s research committee who has conducted research into institutional capital blending their portfolios with stocks, said there are potential “quantifiable benefits” on offer from a multi-asset portfolio with a listed real estate element.

“We need to rethink what role it plays”

Edgar Kresin

A 70-30 split between property Spezialfonds and listed real estate over 10 years would have resulted in annualised returns of 5.4%, compared with 2.9% from solely the former.

“The improvement in performance is dramatic,” Moss said, adding that there is only a “limited rise in volatility or risk”.

Pension fund consultancy Towers Watson noted that a traditional focus by German institutions on Spezialfonds was a reason behind the current lack of demand for real estate stocks.

The consultancy recently surveyed German pension funds responsible for €120bn of assets. Only one had exposure to listed real estate.

Anna Weickart, senior investment consultant and research manager at Towers Watson, said German institutional investors are yet to recognise the role listed real estate can play.

A lack of understanding, the fact that Germany’s REIT model failed to “take off”, as well as concerns over volatility, were possible reasons for the reluctance, Weickart told delegates in a panel on German pensions.

Edgar Kresin, head of treasury for the German state of Saxony Anhalt, said the state’s pension fund has considered real estate in its investment portfolio.

“It’s not easy, it’s our own money, we need to discuss with parliament,” Kresin said.

“We own real estate assets, so it’s nothing new. But it’s new to have it as an asset class and earn money from that. We need to rethink what role it plays. We are open, we need more diversification.”

Speaking on the same panel, Wilfried Baum of Deutsche Bundesbank, said German institutions are “not averse to real estate”. He said: “Germany will make its way – whether that’s through REITs or other routes remains to be seen.”

Germany’s listed real estate sector has had a “record rally”, according to a joint report by Barkow Consulting and Zentraler Immobilien Ausschuss (ZIA).

The recent inclusion of Vonovia, formerly Deutsche Annington, in the DAX30 was the first entrant to the index by a listed property company.

The German listed sector had a market cap of €48bn last month, a year-on-year increase of 73%.

Gross property assets held by the listed sector grew 17% from €66bn to €78bn.

The growth in market cap, however, was almost entirely created by residential-focused firms.

“Growth has to now come from commercial real estate,” said Barkow founder, Peter Barkow.

Alan Supple, managing director of global real estate securities at BNY Mellon, said: “Germany is still dominated by residential.”

The cash flow on offer from German residential property makes the sector a “good hiding place”, with potential for growth, PGGM’s head of listed real estate Hans Op’t Veld said.

Following a period of significant German residential trading, the time of the “mega portfolio” is now over, Barkow said. “Replicating the growth story of the German residential sector on the commercial side will be almost impossible. I doubt it would happen.”

In neighbouring Poland, EPRA has had positive reactions from Polish authorities, Charls told the conference. The country is the “next potential growth market” for listed real estate and could grow into a several-billion-euro market. The first Polish REIT could emerge in the next 12 months, he said.

EPRA said €10bn has been raised so far this year by European property companies through initial public offerings, compared with €12bn in 2014. Companies in EPRA’s €207bn Developed Europe Index have yielded 3.3% over the past three years.

Charls said European listed real estate companies have been “extremely popular” with investors globally.

JP Morgan real estate analyst Tim Leckie said the UK still offers the best prospects in Europe, with rental growth spreading to Germany, Spain and Ireland.

A further two years of low interest rates, alongside rental growth and rising property values, will continue to create a “positive environment” for investors in Europe’s listed sector, Leckie said.