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New regulations are prompting German insurance companies and pension funds to increase their exposure to property.

Last year's Christmas break was anything but quiet for the acquisition team of Allianz Real Estate. In December and January, the real estate arm of Germany's largest insurance company acquired a number of assets at home and abroad.

Recent deals included the acquisition of the 33,000 m2 Medienfabrik office scheme in Munich for an estimated €90 mln. And the spending spree is set to continue.

CEO Olivier Piani recently appointed Mauro Montagner as new CEO of Allianz Real Estate Italy. The economic downturn is currently depressing property prices in the region and scaring many investors away, but Piani is certain that the markets on the northern Mediterranean shores will recover in the long run and believes that the time to buy is now. 'Currently, we are seeing opportunities - and we want to make use of them,' he said.

Allianz Real Estate is not the only Germany insurer aiming to expand its property portfolio. According to recent studies, Germany's insurance companies and pension funds have increased their real estate investments considerably in recent years and plan to continue down this road.

Insurance companies alone have increased their direct property investments in Germany by 5.3% to €120 bn between 2008 and 2010, according to the national statistic bureau Destatis. According to the Bundesbank, indirect investments in Spezialfonds, low level regulated property funds which are only available to institutional investors, have risen by an even higher percentage since 2008 - by 58.4% to €36.6 bn in November of last year.

Increased allocations
Not only are institutional investors putting more money directly and indirectly into property, they are also giving the sector more weight in their overall portfolio, said Wolfgang Kubatzki, member of the board a Feri Eurorating Services. 'Since 2010, German institutional investors grew their real estate exposure from 6.1 % to 7.3 %.'

Insurance companies were the most active players, increasing their real estate exposure from 4.8% in 2010 to 6.0% last year. 'Pensions funds kept their exposure steady at a rate of 10.4%,' Kubatzki added. Since the pension industry plays only a miniscule role in Germany's socialised retirement system, 'the drive by the insurance companies alone resulted in an inflow of €7 bn into indirect real estate assets within the last two years,' he noted.

In Germany, all employees are entitled to a state-guaranteed pension which currently averages about €1,000 a month, depending on earned wages and the number of years worked. To supplement their old-age provisions, most employees enter life insurance plans or private retirement plans with life insurance companies. Only the self employed, for example architects, doctors, lawyers and musicians, must provide for themselves and enter into a pension plan with a pension fund provider.

It comes as no surprise, then, that three of the most active direct investors in real estate in Germany in the past two years have been insurance companies. Allianz was the frontrunner after expanding its property portfolio in the last two years by more than €2 bn, according to real estate adviser Savills. 'AXA Investment Managers Germany with investments of €953 mln and R+V Versicherung with property purchases of €337 mln ranked second and third,' Marcus Lemli, CEO of Savills Germany, said.

German institutional investors will further expand their real estate exposure in the coming years, claims Alexander Schindler, member of the board at Union Investment, a Frankfurt-based fund manager with more than €180 bn under management.

Low government bond yields in triple-A rated countries like Germany and the volatility of the stock market have made property investments very attractive, Schindler added. 'Real estate provides investors with much needed steady income flows and returns, while at the same time providing a hedge against inflation,’ he said.

Schindler's assessment is supported by a Feri survey among 103 institutional investors in Germany with a total of more than €500 bn assets under management. By far the majority - or 64% - of the participants said they plan to expand their real estate exposure within the next two years. Only 7% said they want to reduce the property allocation within their portfolio.

Diversifying outside Germany
Many German investors are also diversifying their portfolios. Already 38% of all property held by German insurance companies and pension funds is located outside the country. That rate will increase even further in the future, Wolfgang Kubatzki said. 'Only 24% of the institutional investors looking to increase their real estate portfolios are contemplating investments in Germany or the German-speaking neighbouring countries of Austria and Switzerland.'

Instead, the majority are looking at markets in other western European countries, with France and the Benelux countries leading the list and named by 24% of those polled. About 19% are eyeing markets in the UK and Scandinavia, 16% are looking at eastern Europe, 12% at southern Europe, 11% at the US, while the Asian markets appeal to only 3%.

In the past, German insurance companies and pension funds had only two choices: they could either buy property directly or allocate money via a Spezialfonds. That has changed in recent years due to deregulation. 'Since 2005 the rate of directly owned property in the real estate portfolios of institutional investors has fallen from 71% to 49%,' Kubatzki said. 'That figure will shrink further in the future,' he added, referring to the impact of Solvency II. The EU Directive to harmonise insurance regulations within the 27 member states will make indirect real estate investments more attractive than direct ownership of property for insurance companies.

Also, a number of Emissionshäuser - investment companies specialised in closed- ended funds for wealthy private investors like Commerz Real, Hannover Leasing and Real I.S. - have successfully launched new products for pension funds and small insurance companies. Members of the German closed funds association VGF saw the total sum generated by institutional investors more than triple over the past two years, from €400 mln in 2010 to €1.36 bn in 2012. About half that money flowed into real estate, with the rest allocated to related assets such as infrastructure, solar and wind parks.

REIT exposure
'In the coming years, institutional investors will also expand their exposure to shares of listed REITs,' said Peter Barkow, founder of Düsseldorf-based real estate investment advisory firm Barkow Consulting. In the past, strict regulations made it unattractive for institutional investors in Germany to hold shares of real estate companies, but regulations are changing that.

One of the frontrunners of REIT investments is MEAG, the asset manager of Munich RE and Ergo insurance group. 'We have already allocated €750 mln to REITs,' press spokesman Josef Wild said. That is equal to 7.9% of MEAG's total real estate investments of €9.5 bn.

Other institutional investors have begun to dip their toes in the water. Fund manager SEB Asset Management attracted €6.14 mln to its Asia-Pacific-REIT Fund A launched in April last year for institutional investors. In the last 12 months Stuttgart private bank Ellwanger & Geiger saw an inflow of about €2 mln from pension funds in southern Germany for its three REIT funds set up 13 years ago for wealthy private customers. It is still early days, but market watchers believe the trend will continue. 'Institutional investors are beginning to see the advantage of REITS', said Ellwanger & Geiger fund manager Helmut Kurz. 'It takes months to acquire or sell a building but only seconds to buy or sell shares,' he added.