Frankfurt, Munich Insurers are increasingly reluctant to invest in real estate. It is true that the real estate quota in the sector has recently continued to rise. The share of real estate in the portfolios of insurance companies was 13 percent last year and thus 0.9 percentage points higher than in 2021. The upward trend of the past 14 years thus reached another record value.
Now, however, a trend reversal could be imminent: currently only 14 percent of the companies want to further increase their real estate quota. Half of that was still planned for 2022.
More than two thirds of the insurers want to keep the real estate quota stable. A good quarter assumes a reduction in the quota, partly also due to devaluations of the real estate portfolio. This is the result of the 16th edition of the “Trendbarometer Real Estate Investments in the Insurance Industry” by the consulting firm EY, for which around 30 insurers were surveyed.
“Insurance companies continue to act as real estate buyers. However, the lower return expectations reflect the overall gloomy view of the market situation. Investments will continue to be made, but with significantly less willingness to take risks,” says EY partner Jan Ohligs, summarizing the situation. In particular, the sharp rise in interest rates since last summer has weighed heavily on the real estate market.
Real estate is an ideal asset class for life insurers who need to invest their customers’ money over the long term. They are considered a very safe investment, similar to government bonds, and they promised decent returns in the low-interest phase.
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Now, however, insurers have to adjust to the fact that the latter advantage no longer applies. For direct investments, which make up a little more than half of the insurance industry’s real estate portfolio, they are planning a total return of 3.8 percent for the current year. In the previous year it was 4.5 percent. For indirect investments such as real estate funds, they lowered their expectations from 5.5 percent to 4.2 percent.
An opportunity for funds
Even if not as many insurers want to further expand their real estate quota as before, according to Ohligs they support the fragile market: “Although they anticipate falling total returns, they continue to refrain from large-scale divestments and sometimes buy selectively.” the current income from rental income is still relevant for the insurers.
In contrast to some other market participants, the insurance companies have not stopped investing, but are looking for opportunities in a more targeted manner. According to EY, the industry knows very well that it can neither achieve the lowest entry prices nor the highest exit prices.
A trend that Allianz boss Oliver Bäte also confirmed at the end of June. “The current downturn in the real estate market is an opportunity for our funds,” he told Bloomberg. In general, he wants to strengthen in-house asset management by investing more in alternative investments. The real estate sector plays a major role.
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In his own words, Bäte is already observing panic sales in the USA. For him, this is a sign that it will soon be possible to buy cheap again. However, it is not yet possible to say when prices have bottomed out. Just this much: “There are companies, also in Germany, that have a lot of stress because they have very high debt capital burdens. You can already find one or the other chance there,” Bäte said.
Not only do you pay higher interest on borrowed capital. Banks have also become more cautious about lending. This is not a problem for the majority of the insurers surveyed, as they often buy direct investments with their own capital. Nevertheless, some companies are holding back on new business.
Alexander Zylla, portfolio manager at Nordrheinische Ärzteversorgung, does not see any attractive opportunities on the market, especially with indirect investments. The sellers have not yet adjusted their price expectations to the higher interest rate environment. He therefore expects corrections in the third or fourth quarter. Portfolio manager Christoph Ditzen from the Bavarian Supply Chamber (BVK) is currently reinvesting returns from funds less in real estate than in bonds.
Focus on logistics real estate
This is also due to the fact that many insurers are less willing to take on high risks. Most companies are therefore currently concentrating on high-quality properties in good or very good locations with stable rental income. On the other hand, risky properties that have a high vacancy rate or a less attractive tenant mix are clearly losing favor with insurers.
The priorities in terms of property types are also shifting: logistics properties have recently become particularly attractive. Residential properties are less in demand than last year, but are more popular than office buildings. For these, Ditzen from BVK expects strong price corrections away from the top locations. However, the rating agency Fitch considers the risks from devaluations of commercial real estate for German insurers to be manageable, as a recently published report shows. According to the EY survey, insurers are least interested in hotels.
The downward trend affects the entire European real estate market. Within Europe, Germany remains the most popular, albeit with a downward trend. Since Brexit was implemented, Great Britain has been one of the big losers. This trend has also continued in the past year.
North America has been the insurers’ preferred location for real estate investments since last year. Interest is also growing in Asia and Oceania. The reason for the weakness of European real estate is the long valuation cycles, explains Christoph Haub, Director at EY Real Estate. They made it more difficult to adapt to the market more quickly and thus to find prices. The USA are further ahead here.
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