Revision period

BVK’s move into global REITs is just one of a number of shifts taking place among German institutions. Barbara Ottawa tracks the changes

A handful of large Versorgungswerke and Pensionskassen are currently re-aligning their real estate holdings to introduce a broader diversification or new instruments.

The €10.5bn Nordrheinische Ärzteversorgung (NAEV) is restructuring its real estate portfolio and no details were available at the time of print but the new portfolio will be run by Jan Schlüter who is succeeding Hermann Aukamp in May.

“We still see that most German institutions are avoiding REITs, because they fear the volatility”

Thomas Hartauer

The €55bn Bayerische Versorgungskammer (BVK) set up two Spezialfonds – with a “global perspective focusing on the Americas as well as the Asia-Pacific region” – managed by LaSalle Investment Management and CBRE Global Investors. Norman Fackelmann, head of real estate investment management at BVK, confirmed that one of the two funds has already made investments and BVK is building a pipeline for the other one.

And Rainer Jakubowksi, managing director at the €25bn banking Pensionskasse BVV, says his new global real estate strategy is “in the starting phase”. First investments were made in the Asia-Pacific region amounting to €200m in total so far – further investments are “under appraisal”.

It is unconfirmed whether the BVV is behind the €1.8bn real estate Spezialfonds with a global focus set up with Universal Investment in summer last year for which first investments were made in the same region.

An unnamed Versorgungswerk hired Quantum Immobilien KAG to manage an individual Spezialfonds in which it is pooling its real estate holdings with Universal Investment as administrator. The fund is investing in inner-city office and retail properties in Germany and has already grown to a volume of €130m, with a target volume of €200m. The most recent addition was an office building in Düsseldorf. The WPV, the €2.3bn pension fund for German auditors and chartered accountants, is “more or less looking at everything” focusing on real assets in its search for risk-adjusted returns, according to chief executive Hans Wilhelm Korfmacher. In late 2013, the WPV increased its real estate exposure considerably, making its first foray into housing, participating in two Patrizia-managed Southern German residential portfolios.

Interest in German residential properties is also evidenced by recent fund launches from Bouwfonds Investment Management and Invesco Real Estate. Bouwfonds announced it had been commissioned by an unnamed “southern German” Versorgungswerk to set up a masterfund structure to invest €400m in residential property in “fast-growing conurbations”.

Among the first assets in the portfolio are project developments in Heidelberg and Freiburg worth €54m, as well as properties In Wiesbaden, Potsdam, Hannover, Hamburg and Leipzig worth €48m. The properties are either new or thoroughly refurbished and are situated in “good and central” residential locations.

Institutional Investment Partners (2ip) has been mandated as the Master KVG, which is the successor to a Master KAG under the new German set of regulations implementing the AIFMD.

The company is also providing the same service for the first residential property Spezialfonds set up by Invesco Real Estate for German institutions with an “initial target volume” of €250m. As its first investment, the fund bought the project Westside Towers with 250 residential units in Munich, also including retail space of 26,000sqm.

BVK leads the way into REITs

BVK launched a global real estate investment trust (REIT) fund at the beginning of the year. “The first investments have already been made”, says Norman Fackelmann, head of real estate investment management at the BVK. The fund, managed by Principal Global Investors and LaSalle Investment Management, will invest €300m.

It might be another example of BVK being ahead of the curve. “We still see that most German institutions are avoiding REITs, because they fear the volatility”, says Thomas Hartauer, CEO of Lacuna, which runs a US REIT fund in conjunction with Neuberger Berman.

“The main reason for their inertia is that they perceive REITs as equity sector funds but not as an alternative for exposure to real estate,” says Dirk Söhnholz, CEO of investment boutique Veritas, and formerly of the German consultancy Feri.

Söhnholz says diversification of real estate portfolios has been hard to achieve via direct investments. The only options apart from REITs have been closedended funds, or the so-called German open-ended funds, both of which are much less liquid.

But investors that shy away from listed real estate are “missing out on return and risk diversification”, according to Hartauer. He adds: “According to BVI statistics, there seems to be a revival of open-ended real estate funds, but those institutions now have a minimum holding period, whereas with a REIT they would have daily liquidity.”

According to Hartauer, “for many German institutions, diversification of their real estate portfolio ends in Europe”. But diversification into REITs would, by default, move German investors into overseas markets, as the REIT market in Europe is limited in size. Lacuna itself “would rather look to diversify into Asia” rather than Europe, Hartauer says.

Robert Stolfo, senior director, client portfolio management at Invesco Real Estate, says “Asia is the region which has caught up the most regarding demand from German investors” – albeit from a very low level. A few investors “are looking to the US but the tax issue is a problem for some”.

He adds: “The advantage of Europe is that different markets in the region are developing along different cycles.” In general, investors were still mainly looking for core and core-plus pan-European strategies, but “they are more and more willing to take a bit more risk”.

Sector weightings, niche strategies

According to a survey by Union Investment of European institutional investors, accepting shorter lease agreements is top on the list for German institutions when it comes to making compromises for adequate returns. Going into project development is less of an option for German investors; they rather opt to put less weight on sustainability criteria in investments, or even accept a lower quality in buildings.

Overall, Robert Stolfo, senior director, client portfolio management at Invesco Real Estate, notices “a strong, if not growing, demand for real estate among German institutional investors”, especially among corporate pension funds and contractual trust agreements (CTAs).

This is corroborated by a survey of German institutions by consultancy Feri. It found the average real estate quota is to be increased by 5.3% to around 10%, while the exposure currently stands at around 6% on average.

Ute Geipel-Faber, senior director, client portfolio management at Invesco Real Estate, notes a change in the client structure in Germany. Five to six years ago, life insurers still played a major role in real estate investments, but “this share is shrinking” partly because of regulatory issues like Solvency II, or FATCA, which “created enormous uncertainties”.

According to Stolfo, German investors also started to show interest in residential properties outside Germany – for example, in the UK, Netherlands and Nordics.

And Geipel-Faber adds that there is also a shift in sectors as, four to five years ago, “everyone in Germany wanted to go into office properties because of expected increases in the rents. But a year or two ago, there has been a shift to logistics because of the growing trend for online purchases and the consequent need for retail storage facilities,” he says.

Interest in logistics is also confirmed by EY which noted in its ‘Trend Barometer 2014’ that investors are more optimistic regarding the positive development in prices for logistics assets in good locations than in the previous year.

This sector is included by Munich-based Real IS as diversification to its sixth Spezialfonds in a pan-European real estate fund series. The company has secured another €200m from German institutions, mainly from the banking sector but also from a few insurers and Pensionskassen, a spokesman confirmed. The fund is to focus on “office and retail real estate”, with logistics assets and budget hotels to be added for diversification. Most (70%) of the assets are scheduled to be invested in Germany, 20-40% in France, and no more than 40% in Benelux markets.

But Real IS is also considering “commitments outside the euro-zone” for a new fund in the series. “We are talking to potential investors about a product that might invest in the UK, in Poland and in Australia in addition to the euro-zone,” says Jochen Schenk, board member at Real IS.

Other providers are focusing on niche products. Andreas Peppel, head of investors’ club funds at 2IP, says the company “decided to offer Investors club funds especially for niche markets or segments to satisfy the demand it is seeing among its clients”.

As a first target market, the Master KVG identified Spain for which the “Selected Spain Recovery Strategies” is launched in cooperation with Jones Lang Lasalle Corporate Finance.

Geipel-Faber points out “investors are looking for asset managers with a strong local presence in the markets they are investing in but the managers also need to have a presence in Germany and need to speak the investors’ language.”

What is also changing in Germany is the choice of vehicles as many managers are noting that investors are more careful to check which form their investment is taking. Some got burned in open-ended real estate funds when they had to close because of liquidity shortages. Others are more cautious to ensure the interests of other investors in a vehicle are aligned.

“More and more institutional investors are looking for fund solutions based on aligned interests of investors, making it possible to efficiently implement the investment and payout strategy,” says Eitel Coridaß, CEO at Warburg-Henderson responsible for portfolio management.

He says a “small circle of investors also facilitated strategy adjustment – for example, when external factors are changing”.

Earlier this year, five unnamed Northern German Versorgungswerke commissioned Warburg-Henderson KAG with a €200m home-biased real estate Spezialfonds mandate to invest solely in Northern Germany, focusing on Hamburg in office and retail, as well as operator-run and special-use properties.

A new hope

Asset managers are putting their hopes in the new vehicles allowed under the Kapitalanlagegesetzbuch (KAGB), including the offering of closed-ended fund structures by all companies with a KVG licence, which also allows former KAGs to continue to launch Spezialfonds.

Hansa Invest is one of the investment managers that wants to make full use of the possibilities under the new law, widening its offerings from Spezialfonds to closed-ended funds. It added that this will make the management of tangible assets like forest, agriculture or timber investments possible. It confirmed that it has been awarded administration as KVG of two closed-ended real estate funds by Habona Invest already.

Other companies are making use of the new Investment-Kommanditgesellschaft (InvKG),a limited partnership allowing the pooling of assets. Torsten Doyen, a member of the board at HIH Global Invest, responsible for client management, sales, marketing and risk control, says there is “major growth for potential” in this new vehicle created under the KAGB.

“The InvestmentKG, for example, allows taxefficient pooling of directly held properties in portfolios,” he explains. This provides investors with integrated reporting and a unified valuation of their properties, he adds.

Similarly, IntReal is using the new vehicle. Managing director Michael Schneider explains that this new vehicle is yet another “regulated instrument” widening the scope for institutional investors. He sees the advantages in tax transparency, as well as flexibility through a higher debt ratio allowed in the InvestmentKG. Schneider confirmed that there was “increasing demand” among investors for the vehicle.

But other market participants remain sceptical about whether yet another vehicle alongside the German and the Luxembourg-based Spezialfonds might be too much competition or even confuse investors.