GERMANY - Cross-border investment in German real estate is pushing German pension fund investors to abandon bricks and mortar for unlisted funds, according to INREV.

In an interview with IPE Real Estate, Lisette van Doorn, chief executive, said: "Investors have been showing interest in the German market, which means German investors can get good value by selling their domestic direct holdings.

"German investors, like other investors, invested indirectly to build up their portfolios outside the country. Now they've built up indirect experience, they're using it in their domestic market."

She claimed reasons for the switch included an increasing sophistication among investors now more concerned with accessing external fund management expertise than diversification.

"Investing in unlisted funds is aimed at increasing the efficiency of the portfolio, rather than setting up an in-house team with local knowledge to manage the assets," she said. "We see the issue of access to external management coming up in every survey. That's a change from a few years ago, when the rationale was diversification."

Compared with property equities, unlisted real estate funds "reflect the risk—return model of real estate", she added.

However, transparency remains an issue even for indirect investors, according to van Doorn, as she stressed the emphasis on performance information "is not specific for German investors, and it is not recent. The real estate industry struggles with transparency. It is not here naturally and we constantly need to put in extra effort to create it. Transparency has improved - market information is available on managers - but there's still a way to go compared with other asset classes".

German institutional investment in unlisted funds fell from €1.22bn in 2006 to €1.05bn last year but van Doorn attributed this to an overall drop in transaction volumes. Despite a drop in property's pan-European performance - a return 3.9% in 2007 down from 21% in 2006 - "investors are not looking to pull out," she suggested, arguing "long-term, they believe in real estate".

"Once you take out the UK and realise the differences within Europe are quite big, add the diversification benefit and the better performance of unlisted funds, it is not too hard a story to sell," added van Doorn.

German pension funds' switch into indirect property follows a longer-term trend already seen in the UK and the Netherlands.

Van Doorn said 19 of INREV's 35 German members (out of a total 300) members were recent joiners, 11 of them investors. "We're seeing Germans join at double the rate of other markets," she said.

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