German institutional real estate investors plan to reduce their overall weightings to their domestic market, reallocating capital mostly to Asia-Pacific and North American markets, according to a survey by Universal Investment.

A survey of investors with more than €55bn in real estate holdings in aggregate found that the average allocation to Asia-Pacific is expected to more than double from 3% today to 8%, while allocations to North America are anticipated to rise from 5% to 9%.

Allocations to Germany, meanwhile, are expected to fall from 69% today to 57%, while the average weighting to other European markets is expected to rise from 23% to 26%. 

“In one of the most challenging market phases of the past decade, real estate remains an important pillar for the majority of German institutional portfolios,” said Axel Vespermann, head of real estate at Universal Investment.

“There have been further structural shifts, however, which have in part intensified. Countries outside Europe continue to gain in significance – a trend which fund initiators and investors need to prepare for.

“It is necessary to manage this growing complexity – which in many areas is accompanied by more varied portfolios – in a professional manner, either through the development of in-house expertise or through the specific involvement of external experts. This concerns transactions and ongoing asset management, as well as structuring and tax issues.”

The office sector, despite disruptions to working pattern and occupational demand since COVID-19, remained the most popular among German institutional investors, representing 40% of allocations, albeit down slightly from 41.4% in last year’s survey. Offices were followed by retail (18%), residential (16.3%), logistics (13%), other sectors (10%) and hotels (2%). 

However, plans for future investments revealed a significant shift towards residential (an increase of 7.7 percentage points) and industrial and alternative sectors (seven percentage points) at the expense of the office sector (which saw a 12 percentage-point decrease) and retail (four percentage-point decrease).

Following an average expected return of 3.85% in 2022, institutional investors are now requiring an average return of 4.1%.

“The repeated interest rate hikes in the past 12 months have led to increasingly attractive alternatives compared to real estate investments – in the bond sector, for instance,” said Vespermann.

“Accordingly, investors are also amending their return expectations upwards on the real estate market. This is predominantly quite simply a phase of normalisation after a long period with low interest rates. In the medium term, the real estate asset class will easily cope with this new competition and remain a key portfolio module.”