German institutional investors take on more risk

German insurance companies have begun to expand their property portfolios and are willing to take on more risk in a move to gain higher yields, according to Olivier Piani, CEO of Alllianz Real Estate.

With more than €550 bn assets under management, Allianz is the largest listed insurance company in the world. However, its real estate assets, valued at €22 bn at the beginning of 2013, account for just 4% of the overall portfolio.

That is way below the percentage of institutional US investors like CalSTRS or CalPERS which have a real estate exposure of 13.4% and 10% of the overall portfolio respectively. But Allianz is set to change that.

'In the next three years, we want to expand our real estate portfolio by €8 bn to about €30 bn, raising the property exposure rate to around 6%,' Piani told PropertyEU. The move is set to go hand in hand with a restructuring of the real estate portfolio. 'Until 2016, we want to reduce the proportion of European real estate from 90% currently to 80% while growing our exposure in the Asia-Pacific-Region and in North and South America from 10% to 20%,' Piani said.

At the same time, Piani plans to reduce the offices allocation in the portfolio from 64% to 45% and the exposure to the residential markets from 19% to 15% while upping the retail portion from 13 to 30%. The aim, Piani said, is to 'develop and manage a truly global diversified portfolio.'

Allianz is by no means the only German insurer that wants to dig deeper into the international real estate sector. According to a new survey by Ernst & Young Real Estate, insurance companies will pump billions of euros into real estate in the coming years.

'German insurance companies are set to grow their property exposure rate from the current average of 7% to 7.6%,' according to Dietmar Fischer, partner at Ernst & Young Real Estate. This year alone, the 50 participants in the survey, representing 80% of the country’s property portfolio, said they want to expand their real estate exposure by €230 mln each on average. That would result in an inflow of €11.5 bn into real estate markets.

Growing appetite of institutional investors
The growing appetite for real estate is already visible in the latest data from Germany's fund management trade association BVI. In the first four months of this year, special property vehicles or Immobilien-Spezialfonds attracted €1.9 bn, more than half of the combined overall inflow of €3.5 bn in 2012. Immobilien-Spezialfonds are special property investment vehicles that operate under German regulations and are open only to institutional investors with insurance companies forming the vast majority of participants. Since more than 85% of the population is covered under the socialized pension and medical system, pension schemes account for only a small portion of Germany’s institutional investment community. At the same time, 90% of German households have at least one life insurance plan to improve their old age provisions.

German insurance companies are not only increasing their real estate exposure. They are also willing to take on more risk in the sector. Until last year, German insurers favoured investments in core property within their home country. But that has changed, according to the Ernst & Young survey. Only 57% of the participants said they were interested in acquiring more core property, down from 70% in the 2012 survey. And even though the vast majority - or 91% - said they were looking for further investments in Germany, 52% also said they were interested in acquisitions in the US and Canada. That is a huge change, Fischer pointed out: 'Last year, only 25% of the participants showed interest in investment in North America.'

The change in investor intentions is a response to the ongoing yield crunch in German government bonds and core property markets within the country. With investors seeking safe havens since the outbreak of the financial crisis, bond yields dropped to just 1.3% in the spring of 2013 and, despite a slight recovery since then, are still well below 2%. Yields of well sought-after core office towers and prime retail buildings in cities like Frankfurt, Hamburg and Munich have also fallen significantly since 2008. 'In Frankfurt, prime retail is currently yielding only 4.25%, in Munich it’s 4.2%,' said Andreas Trumpp, head of research Germany at Colliers International.

The yield crunch is putting more and more pressure on insurance companies. 'The sector is finding it increasingly difficult to achieve the mandatory margin on their life insurance policies,' said Dieter Thomaschowski, head of Thomaschowski Research & Advisory in Erkrath. Even though the German government lowered the mandatory profit margin on new policies to 1.75% last year, the guaranteed margin for older policies amounts to up to 4%. 'In order to meet their obligations, insurance companies have only two choices: to grow their exposure on the extremely volatile stock market or increase their investments in non-core real estate,' Thomaschowski explained.

Yield crunch drives German investors abroad
It is not surprising then that a growing number of insurance companies are looking beyond their country's borders for real estate deals. 'Despite its image as a safe haven, the German property market carries its own risks,' noted Günter Vornholz, Professor of Real Estate Economics at the EBZ Business School in Bochum, citing the statistics of the Investment Property Databank (IPD) in Wiesbaden. According to IPD data collected from annual reports of institutional investors, in 10 of the last 12 years depreciation in German property values due partly to rising vacancy rates has dented a part of the rental income. As a result, real estate portfolios yielded on average less than 4% in six of those 12 years.

In order to tap into foreign markets, insurance companies are also opening their doors further to indirect investments through vehicles other than the Spezialfonds. A prime example is MEAG. Just like Allianz, the investment arm of MunichRE Ergo with €239 bn under management has currently a real estate exposure rate of only 4% with just €9.6 bn invested in property. In the coming years, MEAG wants to grow its property portfolio using a wide range of vehicles. 'Aside from direct investments and Spezialfonds we are also looking at property stocks and REITs,' said Günter Manuel Giehr, management board member at MEAG. While setbacks on global stock markets earlier this year shook many investors, MEAG seized the drop in REIT share prices as an opportunity. Giehr: 'We use market distortions to actively extend our allocation in property shares.'

Richard Haimann
Correspondent Germany