The inclusion of listed German residential specialist Vonovia in Germany’s main DAX index, may provide an impetus to further institutional investment in listed real estate stocks, according to Anna Weickhart, senior investment consultant and research manager at Towers Watson in Frankfurt.

The inclusion of listed German residential specialist Vonovia in Germany’s main DAX index, may provide an impetus to further institutional investment in listed real estate stocks, according to Anna Weickhart, senior investment consultant and research manager at Towers Watson in Frankfurt.

‘The fact that Vonovia is included in the index of top 30 companies in Germany is a milestone,’ she told delegates at the annual EPRA conference in Berlin earlier this week. ‘This will promote the asset class, particularly to local investors.’

Formerly known as Deutsche Annington, Vonovia joined the DAX30 in early September following its takeover earlier this year of sector peer Gagfah.

Until recently regulatory restrictions have prevented German institutional investors from investing in listed real estate stocks, Weickart pointed out. Historically they have invested open-ended real estate funds or Spezialfonds (institutional open-ended fund vehicles). However a large number of these funds are now in wind-down mode. ‘That may also be a trigger for more exposure to securities,’ she added.

Pension funds missing out
Research presented at the conference shows that German pension providers are missing out on higher returns by excluding real estate stocks from their portfolios. A study by Consilia Capital found that a typical Spezialfonds (non-listed institutional real estate fund) could almost double its annual raw investment return from 2.88% to 5.42% by reallocating 30% of its resources to a ‘buy and hold’ real estate element. However, the change also increased the fund’s volatility from 1.03% to 6.53%.

The study also found that implementing a ‘trend following’ equities trading strategy, based on a 10-month moving average, increased the blended portfolio’s performance to 6.94%, with a smaller increase in volatility to 3.45%.

Alex Moss, CEO of Consilia Capital, said: ‘The improvement in performance by blending real estate stocks into a non-listed German institutional property portfolio is dramatic, for a limited rise in volatility or risk, our research shows. The additional benefits of investing in real estate equities, such as improved liquidity, the scope for strategic property-sector diversification and yield enhancement, are not reflected in these figures.’

However, there are obstacles to further investment in listed stocks and not just the fact that they are considered volatile, Weickart conceded. ‘They also offer limited diversification.’

The spectacular growth of Germany’s listed real estate sector in recent years has been driven by large IPOs in the residential sector. Germany may now be the second highest weighted country in the FTSE EPRA/NAREIT Developed Europe index, but the bulk of its stock are residential specialists. Currently they account for 88% of Europe’s listed residential property.

At present, German pension funds have significant exposure to fixed income, Edgar Kresin, head of treasury at the ministry of finance of the state of Sachsen-Anhalt, told the conference. The percentage of real estate securities in our portfolio is quite low, he conceded. ‘German pension funds are still very young, they don’t invest in everything yet.’

Change may be on its way, but it will likely be slow, he added. ‘We’re coming from a 100% focus on fixed income, it will be hard to push persuade our management to move into other asset classes like securities. If we do make a move, it will first be at a regional level before we invest globally.’

Covered bonds
Many German institutional investors do actually have exposure to real estate through covered bonds or Pfandbriefe, noted Wilfried Baum, head of section portfolios at the Deutsche Bundesbank. ‘Covered bonds are an important investment class, but they have the characteristics of fixed income,’ he conceded. ‘They offer very limited returns compared to investment funds, REITs or private equity.’

Many states and federal government bodies also have real estate in their portfolios due to exposure to social housing, administration offices, forests and agriculture, added Kresin. ‘It’s nothing new for them to have it in that sense. What is new is to have it as an asset class that is actively managed.’ The current ‘challenging’ level of fixed-income yields will act as a further impetus, he said. ‘We need to rethink the role of real estate both as an investment and as an owner.’

There is potential for the listed real estate sector to grow further, added Baum. Many German corporates still have a significant amount of real estate on their balance sheets, more on average than Anglo-Saxon players, he pointed out. ‘I wouldn’t say that Germany is averse to real estate, quite the contrary. We have a low ownership quota in the housing sector and a high rental quota so there is a lot of investment potential there. I don’t there’s any need to be pessimistic, Germany will move forward, either through REITs or other vehicles.’