German Institutional investors seeking diversification should “take a close look” at listed real estate investment trust (REIT) vehicles, according to Dirk Söhnholz, chief executive of Veritas.

Listed real estate is yet to form part of most German institutional portfolios. With diversification hard to achieve via direct investment, the REIT structure offers investors an alternative route into property, Söhnholz said. The only other option, he said, was closed-end funds and German open-ended funds, which are much less liquid.

REITs, he said, are not equity sector funds but a “separate asset class in its own right and not a short-term fad but a long-term necessity”. The main reason for institutional investors’ collective “inertia” is the perception that REITs behave like equity sector funds and not as an alternative for exposure to real estate.

Söhnholz  said: “We are beginning to see increased interest from institutional investors in REITs.”

However, from his previous experience at institutional consultancy Feri, Söhnholz acknowledged there was “still a lot of convincing to do” if Germany was to match the neighbouring Netherlands, where large pension funds have major appetite for listed real estate.

Söhnholz also cited a 2012 Swiss Finance Institute study as the “most profound” analysis of the subject to date. The ’Are REITs Real Estate?’ report states that “while the short-term co-movement between REITs and stocks is typically stronger than that between REITs and direct real estate, REITs are likely to bring a similar exposure to various risk factors as direct real estate into a long-horizon investment portfolio.”

REITs are, the report said, expected to also have similar attractive diversification characteristics as direct real estate investment in the long term, at least in the US and UK.

Söhnholz noted that REITs and real estate equities are chosen from a global portfolio according to various quality and value criteria, with environment, social and governance (ESG) and “extreme value-at-risk screening” top of the list.

Söhnholz said ESG was another area where German investors still “needed convincing”.

“Now they accept it – if they are sure that it does not cost performance,” he explained. “But we are aiming to generate outperformance from this ESG screening.”

Geographically, real estate REITs consist mainly of equities from the Asia-Pacific region – mostly Australia, and North America and the US – said Chris Jakobiak, portfolio manager at Veritas.

European equities are also included but “no stocks from either Germany or Austria have ever been selected either because of a too-high tail risk or a shortfall regarding the ESG criteria”, Söhnholz said. This was unlikely to change in the near future, he added.

Veritas, meanwhile, is looking to offer a similar product for infrastructure as well as bespoke mandates for institutional investors. Pure core and basic infrastructure – such as grids and physical infrastructure, will be considered, rather than airlines or utilities, which are included by some infrastructure ETFs and are equities which many investors already have in other portfolios, Jakobiak said.