Allianz SE (ALV) is struggling to buy properties as competition from sovereign-wealth funds and other insurers drives up prices.
Europe’s largest insurer plans to own 30 billion euros ($41 billion) of properties by 2018, Allianz Real Estate Chief Executive Officer Olivier Piani said in an interview. He had targeted having that much by this year.
“Year after year it’s difficult for us to find more than 2 billion euros of investments,” Piani said. “There are a number of new players in the market, sovereign-wealth funds and the like, who pay more than we would be willing to.”
Allianz hired Piani in 2008 to ramp up real estate investments as European insurers sought to diversify assets and generate higher returns. Low interest rates encouraged insurers including Munich-based Allianz and Axa SA (CS) of France to increase their spending on European commercial properties by 21 percent to 11.7 billion euros last year, according to data compiled by Jones Lang LaSalle Inc. (JLL)
Allianz’s failure to meet its target this year is “a slight negative,” said Thomas Seidl, a Sanford Bernstein & Co. analyst with a market perform rating on Allianz. “You should expect slightly reduced investment gains.”
Increased demand for properties has driven returns in some markets to the lowest in years. Average yields for prime office properties in central Frankfurt are at 4.75 percent, the lowest since 2007, according to data compiled by Jones Lang. Falling yields indicate rising prices.
Allianz bought 2.3 billion euros of properties last year and sold 500 million euros, giving it 23.5 billion euros in total. Sovereign-wealth funds increased commercial real estate spending by 13 percent to 9 billion euros, according to Jones Lang. Norway’s $820 billion fund started buying real estate in 2011 with plans to make it 5 percent of holdings.
Real estate is “an asset class that insurers are trying to get deeper into, so buyers need to be careful,” Seidl said. “If prices are too high, Allianz is certainly making the right decision.”
Allianz has also pushed back a goal for its property-loans business, Piani said. The company expects to increase the loans to 10 billion euros by 2017, from 6.6 billion euros at the moment. It previously targeted the end of 2015.
About 5.1 billion euros of the loans are in the U.S., where the insurer has been lending since the 1980s. The company began making European property loans in 2012.
The insurer agreed this month to make a 145 million-euro loan to London-based Evans Randall to refinance the Koenigsbau Passagen shopping mall in the German city of Stuttgart, Allianz said yesterday. In Europe, Allianz has made loans on retail, logistics and office properties, and would consider financing residential deals, Piani said.
The lending business is supported by a gain in property-acquisition volumes. Global commercial-property investment reached $549 billion in 2013, the most since 2007, according to data compiled by Jones Lang.
“There’s a need for financing when there are a lot of equity deals,” Piani said. “Because deals are picking up again, we’ll have a base big enough to grow our loan book.”
Most of Allianz’s commercial-property assets are in Germany and France, according to Piani. The insurer made its first Italian investment in June and it’s nearing a deal to buy a 50 percent stake in a shopping center in northern Italy. The company plans to have 500 million euros invested in that country by the end of this year.
Allianz also plans to increase the proportion of retail properties in its portfolio. The insurer bought stakes in five French shopping centers managed by Altarea Cogedim last year for about 395 million euros and spent another 400 million euros with a group of investors on a mall in Poland. The company will probably invest as much as 300 million euros in European logistics assets, such as warehouses, this year.
Allianz Real Estate is weighing investing in property stocks for the first time, Piani said. He plans to seek approval from the company’s board this year to buy stock in a listed company in one of the countries that share the euro. While Allianz, the parent company, has invested in stocks, Allianz Real Estate’s strategy has been to invest in buildings.
“There are opportunities in some cases to invest in real estate not directly, not through loans, but through stocks,” Piani said.
Allianz will also seek a direct property acquisition in Asia for the first time, Piani said. It has invested in Asia through funds managed by other firms and will look to make a direct acquisition in 2015.
Piani said he’s eager to make acquisitions in Japan, China and Australia. He aims to double the percentage of Allianz’s property assets outside the euro zone. About 90 percent of the insurer’s properties are in countries that use the euro, and the rest are in the U.S., Asia and European countries like Poland and Sweden.
“You can’t ignore a portion of the world that will soon have 30 to 40 percent of global gross domestic product,” Piani said. “It’s like going shopping but saying you don’t want to go in these three stores because they’re on the other side of the street.”
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