LAGRANGE Fund Monitor H2 2023

Institutional Investors Make Data Centres, Light Industrial and Food Retail Funds the Winners among Real Estate Special AIF – Keen Interest in Infrastructure Funds – Secondary Market Funds Outdo Primary Market Funds for the First Time

• Institutional investors intend to keep expanding moderately the real estate share of their overall portfolios and their stakes in special AIF– especially via the secondary market
• Compared to the previous survey, winners this time include funds investing in data centre, light industrial, micro-apartment and food retail real estate
• Risk acceptance: core-plus and core investments dominate, with value-add catching up
• Residential real estate investment funds still in demand, whereas interest in office real estate has clearly declined
• Benelux region the most sought-after foreign market, with investors also strongly interested in France and the UK
• Infrastructure investments subject to marked preference for renewable energies and a mix of various investments (diversified funds)

Frankfurt, 28 February 2024 – Investments in real estate and real estate special AIF continue to play a key role for Germany’s institutional investors. Their growth is to a large extent concentrated in the real estate asset classes of data centres, light industrial, micro-living and food retailing. For the first time, the interest in acquiring units in real estate special AIF on the secondary market has exceeded the interest in primary market funds. Investors are also showing very strong interest in infrastructure investments, also when compared to real estate funds on the primary market.

This is indicated by the findings of the seventh survey for the LAGRANGE Fund Monitor that LAGRANGE Financial Advisory GmbH and INVESTMENTexpo undertook at the end of the second half of 2023. A look at the allocation of special real estate AIF in total special AIF investments suggests a modestly positive index score of 6.21 points. In this context, a score of 1 would signal a drastic reduction while a score of 11 would imply a drastic increase in the real estate allocation among institutional fund investments. It was also the first time that respondents were asked to rate their interest in infrastructure investments within the segment of special AIF investments, using the same scale. This returned an index score of 7.59 points, which signals a manifest interest in an expansion of infrastructure investments.

As far as risk categories go, core-plus investments remain particularly popular among the investments in real estate special AIF, being named by roughly 41 % of the respondents, followed by core investments (30 %). Opportunistic investments accounted for just 4 % and thus continued to play a minor role. Surprising when compared to previous surveys is the steep increase in interest in value-add investments.

The preferences for individual real estate sectors were subject to much greater shifts. While residential real estate with a more or less unchanged share of 16 % (H1 2023: 17 %) maintained its uncontested lead among the responses, other real estate sectors boasted faster growth rates, especially the “new ones”. Conversely, the preference for office real estate took a nosedive, with the 8 % share of this asset class representing half of what it had been during H1 2023 (16 %). Second place was shared by retail sector with a food proportion of 70 % or more, on the one hand, and light industrial, on the other hand, with 12 % each (H1 2023: 8 % and 10 %, respectively). They were closely trailed by logistics with a 10 % share of the responses (H1 2023: 11 %). Municipal administrative real estate with alternative use potential account for 8 % of the responses, the same percentage as office, with micro-living and data centres following closely behind with 7 % of the responses each. A mix of various commercial real estate types and real estate debt were each picked by 5 % of the respondents, senior housing and social real estate by 4 % each.

Among the preferred target regions for investments in real estate special AIF, the strongest interest was shown, aside from Germany, in the BeNeLux countries (13 %), the UK, the US and France (10 % each). Trailing just behind was Austria with 9 % of the responses (H2 2023: 12 %). This makes BeNeLux the most coveted foreign market as it claimed 13 % of the responses (H1 2023: 9 %).

The most important reason for investments in real estate special AIF is currently portfolio risk diversification, which was quoted by 44 % of the respondents. For 21 % of them, the primary reason was the wish to seize specific opportunities in the real estate markets. Out of these, 18 % appreciate the know-how transfer or drawing on management expertise of fund providers above all, whereas the main reason for another 15 % is inflation protection.

The biggest challenge that respondents faced in the context of real estate special AIF investments was once again high property prices combined with low cap rates, which was identified by 38 % (H1 2023: 37 %). Still the second-gravest challenge, accounting for an unchanged 27 % of the respondents, is the financing of real estate investments, whereas the risk of falling prices and rents represents the biggest challenge for a mere 12 % of the respondents anymore (H1 2023: 17 %). Rather, the short supply in suitable assets has moved up into third place lately with 24 % of the responses.

Asked about their preferred segments in the infrastructure market—a question that was included in the survey for the first time—respondents named funds specialising in solar and wind-power investments more than any other (24 % and 15 %, respectively), with demand nearly as strong for diversified infrastructure funds (23 %). Funds focused on other renewable energies and infrastructure debt (8 % each) follow at some distance, as do funds investing in social infrastructure buildings, such as day nurseries, schools, etc. (7 %). This contrasts with the relatively faint interest shown in storage systems and network infrastructure for communication, which accounted for 3 % and 2 % of the responses only.

As far as target regions for infrastructure investments go, Germany topped the list with 38 % of the responses, trailed by other European markets with 33 %, which matches the standard distribution of investment fund structures. For what it is worth, North America claimed one in five responses, well ahead of Asia (9 %).

The main reason for investing in infrastructure special AIF, quoted by over half of the respondents (52 %), is portfolio risk diversification. Second among the most frequently cited motives were specific opportunities in the infrastructure markets, which were decisive for about 32 % of the respondents. Know-how transfer or drawing on the fund providers’ management expertise came in third with around 13 %, whereas inflation protection claimed a much lower significance with around 3 %.

A short supply in investment opportunities is the biggest challenge while investing in infrastructure funds for 41 % of the respondents, and product complexity for another 34 %. Other threats such as economic risks, financing or high prices played a far lesser role, comparatively speaking. This suggests that the perceived challenges differ significantly from those associated with real estate special AIF.

When asked about their inclination to buy units in real estate special AIF via the secondary market, respondents returned an average score of 7,21 points, which exceeds the score returned by the previous survey (H1 2023: 6.51 points). For the first time ever, this puts the figure for the inclination to buy on the secondary market well above the index score for interest in expanding real estate allocation via primary market.

Here, a score of 1 would indicate an absolute lack of interest whereas a score of 11 would signal a very keen interest. As far as the inclination to sell fund units on the secondary market goes, the result of 6.41 points more or less matched the score of the previous survey (H1 2023: 6.44 points). Asked about secondary market buying, respondents named residential real estate more than any other asset class (39 %), followed by logistics and infrastructure with 21 % each, and retail real estate with a food share of at least 70 % next in line (14 %). When it comes to a possible disposal of fund units via the secondary market, office real estate makes up a very high proportion of about 48 %, followed by logistics (22 %), retail with a food share of at least 70 % (17 %) and residential real estate (13 %).

“What the latest survey findings show above all is that the focus of institutional investors with respect to real estate special funds has visibly shifted toward the ‘new’ asset classes like e. g. data centres, light industrial or micro-apartments, the same being true for the continued growth in the primary market. The ‘old’ asset classes, such as office or residential, are largely traded on the secondary market. But logistics has a strong presence on all markets,” said Dr Sven Helmer, Managing Director of Lagrange.

In regard to infrastructure investments, which were included in the survey for the first time, Monika Bednarz, Managing Director at Lagrange, had this to say: “Infrastructure is stronger than expected, and it will keep gaining in significance. It continues to be under-allocated in the portfolios of institutional investors, similarly as the ‘new asset classes’ in real estate. Another fascinating trend is the convergence of real estate and infrastructure investments, whereby investments in either asset class feature characteristics of both. Once again, data centres represent a good case in point, as does social infrastructure or equipping real estate assets with infrastructure facilities such as photovoltaics.” The polled companies hail mainly from the insurance, banking, pension fund and superannuation scheme sectors.

Company Contact:
Lagrange Financial Advisory GmbH
Monika Bednarz
Managing Director
Phone:  +49 69 50 50 60 4932
E-mail: monika.bednarz@lagrange-fin.com

Press Contact:
RUECKERCONSULT GmbH
Peter Dietze-Felberg
Phone:  +49 30 2844 987 62
E-mail: dietze@rueckerconsult.de

About Lagrange Financial Advisory GmbH
Lagrange Financial Advisory GmbH (Chartered Surveyors) is an independent multi-asset consulting firm serving institutional investors in the areas fund advisory, mergers & acquisitions and debt advisory, and concentrating its expertise mainly in the asset classes real estate, infrastructure and private debt as well as on secondary market transactions. The focus in the fund advisory division is on the placement of fund shares with institutional investors. The company’s team is made up of experts in the areas of investment funds, real estate, infrastructure and debt, and covers the global markets in the investment fund sector as well as the secondary market trading of equity interests. Its investors hail mainly from Germany or other German-speaking countries (the DACH region). Overall, the company placed 40 different funds in a combined volume of c. 3 billion euros in the real estate sector in more than 110 transactions over roughly the past 8 years or recommended investments in these funds to institutional investors before implementing the corresponding transactions.