Institutional investors return to real estate special AIF, with growing interest in debt investments

Institutional investors in Germany are once again expanding their exposure to real estate special alternative investment funds (AIF), with a noticeable increase in appetite during the second half of 2024. Real estate debt, data centres, and light industrial assets have emerged as key areas of interest, while secondary-market transactions are gaining traction as an alternative to primary market investments. Infrastructure investments are also becoming a priority, particularly in renewable energy and diversified funds.

These insights stem from the latest LAGRANGE Fund Monitor survey, conducted by LAGRANGE Financial Advisory GmbH in collaboration with INVESTMENTexpo. The study, based on interviews with institutional investors from insurance, banking, pension funds, and superannuation schemes, indicates a positive shift in sentiment toward real estate special AIFs. The index score for real estate AIF exposure within portfolios reached 6.83 points, up from 6.25 in the first half of the year. The level of interest in infrastructure investments remained steady at 7.10 points, suggesting continued demand.

Shift in Risk Appetite and Asset Preferences

Core-plus investments continue to dominate risk preferences, widening their lead over core investments. Core-plus assets now account for over 48% of investment activity, while core assets make up around 32%, slightly down from 33% in the first half of the year. Interest in value-add investments has declined to 17% from 22%, and opportunistic investments have also dropped to just 3%.

Among real estate asset classes, residential real estate remains the most sought-after, with interest rising to 16% from 13%. Logistics follows closely at 14%, up from 12%. Notably, real estate debt has gained prominence, accounting for 11% of investment activity, nearly doubling from the previous period. Light industrial and data centres, both receiving 10% of responses, have also gained traction, with the latter benefiting from increased demand driven by artificial intelligence and cloud computing. Food-anchored retail real estate attracted 9% of investor interest, while office assets continued to decline, representing just 5% of responses.

International Investment Preferences

Germany has regained investor interest, with 16% of respondents favoring it as a target market, up from 13%. The Benelux region remains popular, rising to 14%, while France and the United States each garnered 12% of responses. The United Kingdom followed with 10%, and Austria attracted 9%. The Nordics and Southern Europe received 6% each, with other markets drawing limited attention.

In infrastructure investments, renewable energy projects, particularly in photovoltaics and wind power, continue to be the primary focus. European markets remain the preferred investment destinations, with 38% of responses, while interest in North America stood at 19% and Asia at just 4%.

Market Challenges and Secondary Market Growth

Financing has emerged as the primary challenge for institutional investors, with 55% citing it as a concern, up from previous levels. High property prices and low cap rates were cited by 26%, while concerns over declining property values and rents were expressed by 13%. A low supply of available assets was identified by just 6% of respondents. In infrastructure AIFs, financing difficulties and the complexity of investment products were each flagged by 25% of investors.

Interest in secondary-market transactions is increasing, with the index score for purchasing real estate special AIF units on the secondary market rising to 7.39 points from 7.06. For the third consecutive period, secondary-market interest has surpassed primary market interest. The inclination to sell units has also grown, with the index score rising to 8.06 points from 7.19.

Preferred secondary-market acquisitions include residential real estate (32%), logistics (23%), and food-anchored retail real estate (22%). Conversely, office real estate funds are the most likely to be sold (59%), followed by logistics (14%), residential (11%), and food-anchored retail (11%).

Expert Insights

Dr. Sven Helmer, Managing Director at LAGRANGE, noted: “The results confirm what we observe in daily investor conversations. The secondary market is becoming an increasingly important exit strategy for special AIF investments.”

Monika Bednarz, also Managing Director at LAGRANGE, highlighted the financing challenges and the growing role of real estate debt: “Many banks are restricting financing, which presents challenges but also creates opportunities for investors to finance real estate debt directly. Current market conditions, with adjusted property values and higher margins, make this an attractive option—provided investors carefully assess the structure of the debt.”

The survey findings suggest that institutional investors are actively adapting to market conditions, with an increased focus on alternative investment strategies and a growing acceptance of new asset classes.

Photo: Monika Bednarz, Managing Director and Dr. Sven Helmer, Managing Director at LAGRANGE