Real estate is playing an increasingly important role in capital investments. The real estate market enjoys a reputation as an important real asset class, which results largely from its long-term stable cash flows and the low fluctuation in value, thus low correlations with other asset classes. For these and other reasons, ratings have risen steadily in recent years. The question arises as to how insurers will deal with this important asset class in the future.
The Versicherungsforen Leipzig, therefore, carried out a study on the role of real estate in the capital investments of German insurance companies from December 2017 to March 2018 together with PIA Pontis Institutional Advisors, an investment advisor specializing in real estate. It was necessary to determine which role real estate currently plays within German insurance companies’ asset allocation, what the future allocation should look like, and which factors influence these decisions.
The four quadrants of real estate investment
First, the possibilities of real estate investments in four asset classes were summarized and processed in a structured manner: Market access in the real estate sector can be viewed as four quadrants because they describe.
- direct investment in real estate via equity (private real estate equity)
- the investment via non-publicly tradable debt instruments (private real estate debt)
- the investment via listed vehicles in the form of equity (public real estate equity) and
- Debt capital instruments that are publicly tradable on the market (Public Real Estate Debt).
The study was carried out qualitatively through personal interviews with decision-makers from German insurance companies in the first step. The statements were then representatively validated using a standardized survey. All in all, specialists and executives from 25 German insurance companies took part, with around 500 billion euros in capital investments, which account for almost 40 percent of the market and thus generate valid results.
Higher allocations planned, differentiation in the individual strategies
The study results were clear: an increase in the allocation is planned across all quadrants; Real estate will therefore play an (even) more important role in the capital investments of German insurance companies in the future. The direct investments lead with a target allocation of 6.3 percent (currently 5.3 percent) above all other quadrants. The total target allocation for the next few years was 10.4 percent (currently 8.5 percent). Accordingly, private real estate investments should continue to form the core of real estate investments (private real estate equity and private real estate debt). Public real estate investments are mostly assigned to other asset classes such as shares (public real estate equity) or fixed-income securities (public real estate debt), both in terms of allocation and organization.
In the direct investments, residential, office, retail, and logistics holdings dominate, while parking garages, student apartments, and self-storage properties will continue to lead a niche existence in the short to medium term. Basically, German insurance companies differentiate between national investments, the majority of which are managed and managed themselves, and international investments, which are given to external mandates due to the lack of local know-how, which is seen as essential for a successful real estate investment.
In summary, market participants in the real estate sector are not guided by market cycles and corresponding valuations. Still, because of the current valuation level, they try to enter into debt capital investments such as private debt, which are regarded as less volatile than equity investments.