Allianz-Versicherung has acquired a new high-rise office building in downtown Frankfurt for a record sum of 1.4 billion euros.
(Photo: dpa)
Munich Insurers are becoming increasingly reluctant to invest in real estate. After the rate in the overall portfolio reached a new high of 12.1 percent last year, there are now signs of a trend reversal. This is the result of the 15th edition of the trend barometer for real estate investments by the consulting company EY, in which 30 well-known insurers took part.
According to the trend barometer, the war in Ukraine, the pandemic that has been going on for more than two years and the stagnating high inflation are turning the environment upside down.
Insurers in particular had massively increased their investments in real estate for many years. Within a decade, the share in the overall portfolio has more than doubled to 12.1 percent. In 2020 it was still 11.5 percent. Small and medium-sized life insurers in particular, such as Berliner Ideal, Bayerische and LV von 1871, rely on real estate portfolios in good locations in Berlin and Munich.
The explanation for this was simple: real estate is considered a very safe investment, similar to government bonds, which continue to dominate in insurers’ portfolios. For life insurers, they also had the advantage of long-term investments, which the regulators require for the investment of long-term life insurance premiums.
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They also promised attractive returns even in times of zero and negative interest rates. According to EY calculations, last year it was 5.5 percent for direct investments in real estate and 5.6 percent for indirect investments such as real estate funds.
Return expectations are falling
“Now there are slightly falling return expectations,” says Jan Ohligs, partner at EY. The rise in costs, higher requirements for energy efficiency and rising interest rates on financing mean that insurers are acting more cautiously. That’s why many are waiting at the moment to see what developments will become apparent in the future.
According to Ohligs, the opinion in many places is that purchase prices should fall as interest rates rise. There is no sign of that at the moment. A number of insurers are therefore relying on the time factor and waiting when making new investments.
The general tactics in this area also include the fact that the market for interested parties in large real estate projects is currently changing. “Anyone who is dependent on financing can often no longer buy,” observes Jan Ohligs.
Banks have become more cautious about lending. The insurers, who are usually still sitting on bulging coffers, are often not dependent on this. The EY consultant therefore believes that the industry will become more active again after a period of waiting.
The recent restraint does not apply to extraordinary projects with high future potential anyway. An example of this is the T1 Tower in Frankfurt, which last year became the largest single property deal in Germany with a volume of 1.4 billion euros. Allianz Real Estate bought it together with the Bavarian supply chamber. Both companies had previously worked together on the purchase of the Edge East Side Tower in Berlin.
The Frankfurt T1 Tower is scheduled for completion in 2024 and, with 54 floors and 233 meters, is the tallest of a total of four towers that are to be built as part of the “Four Frankfurt” project. Boston Consulting, Deka and the commercial law firm Freshfields Bruckhaus Deringer have already been confirmed as long-term tenants.
North America is overtaking Europe
Overall, however, the attractiveness of the European real estate market is currently suffering. The uncertainty in the energy supply and the proximity to Russia have led to a shift in priorities among investors. North America has replaced Europe as the preferred location for real estate investments.
Interest is also growing in Asia and Oceania. Demand in Eastern Europe, on the other hand, has almost completely disappeared. The situation seems too uncertain at the moment. In Europe, Germany remains the most popular, even if the poll numbers here have recently declined.
The priorities for the different types of real estate have shifted. Despite the enormous price increases, residential buildings are still in demand among insurers. The scarcity paired with the high demand from interested parties make the market more attractive. Office buildings stabilize after lockdowns end. Logistics halls and infrastructure investments also remain in focus. Retail branches and hotels, on the other hand, are still difficult.
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