A heavy exposure to Germany proved to be a winning strategy for European property funds last quarter, and advisors are continuing to favour real estate investments in the region's largest economy to "weather ongoing volatility" elsewhere on the Continent.
A heavy exposure to Germany proved to be a winning strategy for European property funds last quarter, and advisors are continuing to favour real estate investments in the region’s largest economy to “weather ongoing volatility” elsewhere on the Continent.
Property funds with at least 70% exposure to Germany made 0.7% returns in Q2, while funds invested in at least three European markets – with no exposure to any single market in excess of 70% – lagged behind with 0.2% returns.
This trend, identified by index providers IPD, has been mirrored, over the longer term, by European equity funds with a leaning towards stocks in Germany. Portfolio returns of equity funds with a heavy focus on Germany have comfortably beaten average European equity fund returns since the onset of the financial crisis in mid-2007, according to earlier research by data provider FE.
Over three years, four of the five equities funds in FE’s examination beat the IMA Europe ex UK sector’s 13.4% returns, by at least 8%.
With this in mind, focusing on Germany is proving to be a more profitable strategy than trying to gain exposure to a wide variety of European assets both in the equity and real estate sectors.
Targeting regional exposure for Continental property increasingly makes sense as price correlations between geographies break down. Recent research by asset managers Henderson shows the correlation between European property markets fell to just over 40% in the first quarter. This is lower than the levels witnessed before the creation of the euro.
Simon Marx, national director for European research and strategy at global real estate manager LaSalle Investment Management, said: “In this environment (Europe) we recommend that investors’ focus should still be on the markets best able to weather the ongoing volatility: Germany, the UK and the Nordics.”
When allocating to German real estate funds, investors would do well to look beyond the “classical office-focused strategy,” IPD said.
On a sector level, funds investing across Europe but with a retail property focus stood out as the top performing real estate portfolios in the second quarter. IPD’s quarterly indicator revealed these types of funds made 0.8%.
Funds investing in office spaces, on the other hand, did not do any better than pan-European property funds.
The IPD indicator covers property Spezialfonds regulated by German investment law and public real estate funds for institutional investors. It collects data on about half of the 200 funds present in the market.