Institutional investors are legal entities or companies that have significant corporate assets that they invest and manage for themselves or third parties.1 They can invest in properties either directly or indirectly through other institutional investors. Given their generally large investment volumes, they are highly relevant on the capital and property markets and can have a decisive influence on them.2
Different groups of institutional investors can be distinguished between based mainly on the following features:
Institutional investors with a property-dominated portfolio mainly include the following types:
On the property market, asset management companies in particular include open-ended mutual property funds, open-ended special property funds and closed-end property funds.4 Asset management companies manage fund assets and invest these in property in the form of investment funds for the joint account of investors.5 In accordance with section 20(1) sentence 1 of the Kapitalanlagegesetzbuch (KAGB – Investment Code), asset management companies require a written license from the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin – German Federal Financial Supervisory Authority).6
Property stock corporations have the legal form of a stock corporation and invest in properties. This mainly means companies that generate at least 75% of their sales and income through property transactions. These include sales and income from renting and leasing, property management, property trading, project development and property consulting.
Real estate investment trusts (REITs) are a special form of property stock corporation that was introduced in Germany in 2007. They are subject to provisions of the Act on German Real Estate Investment Trusts (REIT-Gesetz). Under certain conditions, REITs have the ad-vantage that no taxes are incurred at the company level, enabling a higher profit distribution.7
In Germany the DIMAX, published by Ellwanger & Geiger since 1995, tracks the most important German property stocks in an index.8
At an international level, EPRA indices represent European property stocks; in the US this is NAREIT.
Institutional investors with mixed investment portfolios mainly include:
Insurance companies and pension funds invest in different asset classes. The property ratio in their investment portfolio is dependent on their core business activity. For example, life insurance providers invest more in than non-life insurers, which require greater liquidity.
Pension funds are independent institutions that invest company funds in the context of occupational pensions. Investments by pension funds are long-term and more risk averse, which makes property an attractive asset class.
Overall, insurance companies and pension funds are considered important players on the property market on account of their high investment volumes, even though their share of property assets tends to be low relative to their total investment volume.9
Foreign investors are insurance companies and pension funds, property companies and in-vestment funds domiciled abroad that invest funds on the German property market for third parties.
International investors on the German property market also include risk-savvy investors such as opportunity funds or private equity funds.10 These investors usually have a mixed investment portfolio, though there are also property-dominated players.
Compared to private investors, institutional investors have the advantage that their capital and expertise are aggregated. This means that the benefits of lot size and maturity transformation, in addition to risk reduction, can be achieved through diversification.11