Munich Re’s asset-management unit plans to invest more in real estate lending and REITs as returns from direct property investments come under pressure and banks cut their loan portfolios.
The company is turning to real estate investment trusts and is exploring “options for commercial real estate lending to offer our clients low-risk and stable long-term returns,” Guenter Manuel Giehr, management board member and global head of real estate for Munich Ergo AssetManagement GmbH, said in an interview in Munich.
MEAG, the asset manager for the world’s biggest reinsurer and its primary insurance unit Ergo Versicherungsgruppe, plans to increase its 5 billion-euro ($6.5 billion) real estate lending portfolio by about 20 percent over the next two to three years, said Giehr. Opportunities may arise as European banks cut their 2.4 trillion euros of lending to real estate companies to meet tighter capital regulations.
“The trend in real estate lending is favorable as banks need to disband or reduce such portfolios to comply with Basel III rules,” Giehr said. “The market will be reallocated over the next two years or so and insurers’ asset managers consider the senior segment as most appealing.”
European banks will cut real estate lending by about 25 percent to meet tighter rules agreed by the Basel Committee on Banking Supervision, Morgan Stanley wrote in a March report.
About 4 percent of MEAG’s 226 billion euros of assets under management are invested in real estate, including as much as 250 million euros in REITs.
MEAG’s focus in property acquisitions is on “large-scale specialist retail parks in regions that do not appear to be too attractive on the first glance, but where a current return of 7 percent per year is achievable,” Giehr said. Logistics centers or harbors and airports also offer potential, he said.
“Residential real estate currently receives enormous attention from private investors, which has led to a drastic increase in price levels,” Giehr said. “In view of potential recession risks, we find the purchase of pure office properties currently somewhat difficult to justify.”
REITs, which invest in a portfolio of property assets, are also an attractive asset class for MEAG, said Giehr.
“REITs offer more transparency, better liquidity and add to our portfolio diversification,” said Giehr, who is targeting 10 percent of MEAG’s real estate assets for such investments. “REITs satisfying our valuation criteria, including an analysis of the underlying property portfolio, will be picked up at any opportunity, especially in markets abroad such as the U.S., Switzerland, Japan, Hong Kong or Singapore.”
The Bloomberg Real Estate Investment Trust Index, which tracks 111 REITs based in the U.S. and Canada has gained 13 percent this year, after advancing 4.1 percent in 2011 and 25 percent in 2010.