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The property ratio of German insurance companies has reached a pivotal moment, stagnating at a record high of 13.1% for the first time in twelve years. According to the recently-published EY Real Estate Investment Trend Barometer for 2024, this stabilization comes as insurers grapple with higher interest rates, regulatory pressures, and the need for energy-efficient upgrades.
The EY Real Estate Investment Trend Barometer surveyed around 30 German insurance companies to gauge their current and future real estate investment strategies. The findings highlight significant shifts in investment focus and risk appetite amid a challenging economic landscape.
Despite the high property ratio, 19% of insurers plan to reduce their real estate allocations, up from 16% in 2023. Additionally, 25% intend to sell more properties than they purchase, reflecting a cautious approach to real estate investment. The survey underscores a broader trend of portfolio optimization, with 68% of respondents aiming to streamline their holdings in the short to medium term.
Yield expectations and risk appetite
Yield expectations have shown a slight increase from the previous year, with indirect portfolio yields rising from 4.2% to 4.5%, and direct portfolio yields from 3.8% to 3.9%. This uptick is accompanied by a shift towards the “core+” risk category, which offers higher returns compared to the more conservative “core” investments.
“Property investments are currently not in an easy position with the insurance industry,” explains Jan Ohligs, Partner at EY Real Estate. “Compared to other asset classes, they are becoming less attractive due to higher interest rates and the additional costs of energy-related transformations, which reduce achievable returns.”
Compared to 2023, the survey reveals a marked decline in insurers’ enthusiasm for expanding their property portfolios. Last year, 14% of companies intended to increase their real estate allocations, but none express such intentions this year. Instead, the focus has shifted towards maintaining or reducing current holdings, driven by economic uncertainties and regulatory challenges.
Regional comparisons and sector preferences
The attractiveness of different regions for real estate investment has shifted significantly. Europe, once a favored destination, has seen approval fall from 39% in 2023 to just 22% in 2024. In contrast, North America (44%) and Asia and Oceania (49%) have become the most popular investment locations. Within Europe, Germany remains the top choice (81%), while the UK continues to lose ground.
“Even local companies in the insurance industry, which prioritize long-term viability and reliable cash flows, apparently no longer see these in Europe,” notes Christoph Haub, Senior Manager at EY Real Estate. “The varnish on the often-postulated ‘safe haven’ is beginning to crumble.”
Shifting focus from regional preferences, the survey also highlights changes in sector attractiveness. Residential properties remain the most favored asset class for insurers, with 69% expressing a preference for this sector. However, interest in logistics properties has declined from 77% to 62%, and infrastructure investments have dropped from 64% to 34%. Office properties, traditionally a significant part of insurance portfolios, have also seen reduced interest, now only favored by 19% of respondents compared to 52% last year.
CO2 reduction targets and energy efficiency
The drive for energy efficiency and CO2 reduction is a dominant theme in current portfolio strategies. All survey participants identified energy-efficient refurbishment as the most pressing need. Despite the costs, 62% of insurers plan to implement these measures themselves and keep the upgraded properties in their portfolios. Another 62% are interested in acquiring already-upgraded properties.
“ESG compliance is one of the main drivers of current portfolio strategies,” adds Haub. “The insurance industry no longer doubts that ESG-compliant investments can also make economic sense.”
Among the preferred type of investment, direct holdings remain the preferred type for 62% of insurers, followed by closed-end property funds (56%). Alternative investments, such as real estate debt funds, play a role for a quarter of respondents, while project developments and global REIT funds remain less popular.
The refinancing environment remains challenging, with 94% of insurers noting restrictive lending practices and lower loan-to-value ratios impacting their investment decisions.
In summary, the real estate investment landscape for German insurers is undergoing significant changes. Higher interest rates, regulatory pressures, and the need for energy-efficient upgrades are reshaping their strategies. While yield expectations are rising slightly, the focus is shifting towards maintaining or reducing property ratios, with a cautious approach to new investments. Europe, particularly Germany, remains a key region, but the overall attractiveness of European investments is waning compared to North America and Asia.
As insurers navigate these challenges, the emphasis on ESG compliance and portfolio optimization will continue to shape their real estate strategies, ensuring they remain resilient and adaptable in a very volatile market.
