GERMANY - Total returns for German real estate declined for the second consecutive year, but pension funds in the country have continued to focus heavily on their domestic market because it "feels safer", according to a leading pension fund manager.

The German Property Index (DIX) fell from 3.5% in 2008 to 2.5% in 2009, according to latest figures from Investment Property Databank (IPD).
Despite this, Hermann Aukamp, director of real estate at Nordrheinische Aerzteversorgung (NAEV) and an adviser to other pension funds, said his emphasis has been on core assets in prime German locations.

He said the long-term trend to diversify globally had not stopped, but said he believed it had slowed substantially for an indefinite period while investors regain confidence in the real estate market.

"People are not so much in favour of getting bigger exposure to overseas markets in a very short time," he said.

"They are much more reluctant for various reasons now. They feel the home market is a safe place to be."

One of the most popular investment opportunities for German institutional investors has been multi-family residential assets in German cities.

"Multi-family developments are really in favour now. This is a very risk averse investment, but people feel safe," Aukamp said.

Residential real estate in fact delivered the highest total return in 2009, according to new IPD figures, at 5.3%; up 90 basis points on 2008.

In comparison, retail properties yielded a total return of 2.6% (a drop of 190bps on last year) and office properties returned 2% (80bps less than 2008).

NAEV, a pension fund for doctors, will itself be looking for multi-family investments and core real estate in Germany, but Aukamp said it would also be looking to invest in France and the UK.

Aukamp said he expected German pension funds to increase their investment activity by the third or fourth quarter of 2010, and some of this might be outside Germany, but only in select markets.

"Most pension funds want to increase their allocation to real estate," he said

"A lot of it will be in Germany, but I think France and the UK will make up a certain part of it, and to a lesser extent niche markets like Canada or Asia."