The Small World of Institutional Investors

Published on 2012/11/19

According to a recent survey, Germany’s demographic development will cause it to drop back from fifth to tenth place among the industrialised countries in the coming decades. This insight does not do anything, however, to keep German insurance companies and other institutional investors from concentrating 60% of their real estate in Germany. The property they own in the United States equals 6% and that in the Asia-Pacific region 0.6% of their total real estate holdings. Investments in Latin America account for less than 3% of the assets held by Germany’s institutional players.

In how small a world do German insurance companies actually live? There is nothing wrong with German real estate, I myself love to buy property here. But keeping 60% of your real estate commitments in a small country with negative demographic prospects? And less than 7% in the US and Asia (combined)? No sensible person would dare to compile their equity portfolio in this manner. As far as equities go, word has gotten around that it is important to diversify internationally, including in the United States and Asia.

I admit: it is harder for German insurers to invest in Asia, for instance, because they lack the expertise. Even for the United States they often lack the know-how. But is this not what indirect real estate investments such as specialised funds or REIT are for?

It is a good thing to see that the real estate ratio of institutional players has risen to 7.3%. My doubts regarding a figure recently communicated in a poll, suggesting that the real estate ratio had risen from 5% to 15% within a short period of time, have been vindicated by the latest Feri stats. Of course the figure was incorrect.

Does the actual increase by roughly one percentage point solve the performance problem of German insurance companies? Of course it does not. It will not affect the overall performance of the investments except perhaps in the second decimal place.

The combined ratio of equity and real estate investments of German insurance companies approximates 10%! This is disastrous. Given such an investment strategy, insurance companies are likely to have the hardest time meeting their commitments. Aside from the insurance companies, some of the blame goes to the German lawmakers, because they drive insurers (not without a selfish motive of their own) back into government bonds while making equity and real estate investments a costlier affair.

One argument occasionally fielded to explain why insurance companies have failed to step up their real estate investments is that there is simply not enough real estate to go around and that it has become impossible to let in-house staff do the buying. This may be true for a small world primarily limited to Germany. But is there not plenty of real estate to choose from elsewhere in the world? To say it again: why not invest in Asian REIT, for example? The competence of the often highly specialised companies in this region is sure to be much higher than that of German institutional investors. Yet under no circumstances do German institutional investors wish to acquire listed real estate stock, their quota in this investment segment being barely 0.3%.

None of this strikes me as particularly professional. The same goes for the planned reallocation of investments by types of use. 28% intend to step up their investments in residential property, now that prices have soared. A few years ago, when you could still enter the market on favourable terms, insurance companies sold off most of their residential holdings and turned their back on this allegedly low-yield investment class. Instead they stressed a mono-track commitment in office real estate, as did open-ended real estate funds, which also consistently steered clear of residential assets. But what about corporate real estate, an important but still massively underrated asset class in Germany? The Feri statistic does not even list this group as a separate segment, but probably tuck it away into the “mixed-use category” in which barely 2% of the institutional investors intend to invest.

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